Top 3 Factors in China Stocks Rise and Fall

Gene Linn |

hong kong stocks, hang seng index, china stocks, shanghaiThe great [early] rally for China stocks ended in late February with a surge of 18% in Hang Kong's Hang Seng Index. Since then, the market has drifted lower in fits and starts. Higher bond prices in Spain, good results by some big US companies and other news from abroad take turns bouncing stock prices up and down.

On Thursday, news that China's central bank would appropriately fine tune the monetary policy, helped send the Hang Seng up 1.0% to 20,995 in very slow trading. The index of Chinese companies rose 1.4% to 11,047.

It's a good time to examine the underlying factors for China stocks that might lead them on a sustained move, up or down. So let's look at the top three issues boosting stocks and the bottom three dragging them down.

The Top Three

1. Prospects that slowing growth in China has bottomed out with March's disappointing GDP numbers, and that inflation will resume its descent after a surprising rebound in March. Monetary stimulus and better times are coming.
2. Stock valuations are attractively placed near historical lows for PE ratios.
3. New Chinese leadership due in the fall will result in more consistency in economic policies.

The Bottom Three

1. In an ugly mirror image of number 1 of the top three – China seems to have the worst of both worlds: Economic growth is sinking as a result of the fight against inflation, but inflation remains stubbornly high.
2. The European debt crisis is constantly on the brink of a disaster that could sink global markets.
3. High debt in local Chinese governments likely will be picked up by big banks, which are already dealing with bad loans.

Which trio will win out in the longer term? The widely held view that the Chinese recovery will take hold in the second quarter is over optimistic, in my opinion. The downward momentum for growth is strong and inflation is too unyielding to permit significant loosening of monetary policy.

For what it's worth, I think stronger growth will not appear until the second half of 2012, possibly late in the second half.

And we might keep in mind that many thought that lower inflation and higher growth would push the Hang Seng to 25,000 or so late last year, but the index ended 2011 at 18,434.

One analyst said big-money investors aren't trying to anticipate a turnaround in China; they are waiting for clear signs of low inflation and higher growth. That might be a good idea. End

DAILY FIX

Hong Kong Blue Chips: +214, +1.0%, to 20,995, 04-19-12, Hang Seng Index

Chinese Stocks in Hong Kong: +151, +1.4, to 11,047, 04-19-12, HSCE Index

Shanghai Stocks: -0.1% to 2,379, 04-19-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: +4.0, 403.2, 04-18-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong opened lower after losses in the U.S., but rebounded when the Chinese central bank said monetary policy would be appropriately fine-tuned. Government aid for the new energy auto sector pushed Sinopoly Battery (CAOHF) 5% higher. Insurers gained due to speculation the government would expand their investment options: China Life (NYSE) +4%. KGI Research

Quotable: "We expect the market to be directionless and keep seesawing." Core Pacific Yamaichi. 4-16-12

Chinese Company to Watch: “China Coal Energy's (CCOZY) core net profit hit RMB9.802 billion in 2011, up by 31.3% on a year-on-year basis, much faster than 3.8% and 0.8% in the previous two years, which mainly benefited largely increased coal business and the profitability of self produced coal. China Coal Energy's most prominent growth in 2012 will come from the Pingshuo East Open Pit Mine Project, which may let its coal output increase rapidly." Phiilips Securities. 4-17-12

Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN

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DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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