China – waiting for the Ox

Hang Seng (13.971)  Shanghai B (120)  USD/CNY (6,8350)

Very interesting with Hang Seng down 10% since last Monday and Shanghai B up with 5% during the same period. So let’s see what market is behaving most realistic.

Last Monday I mentioned the risk that the Chinese government could force Chinese banks to abandon normal risk control and management regarding lending to private households. On Tuesday (6^th Jan) the Peoples Bank of China came with different statements, among these:

“PBOC to guide banks to increase lending” and “PBOC to boost financing channels for small, medium-size customers”.

As you know, do I not recommend to be long any shares at all. Should there by coincidence be any, then I still argue that Chinese bank stocks are difficult to hold as the banks might be forced into lending risks they shouldn’t take.

Friday, the China business confidence for Q4 2008 was released showing 94,6. This is the lowest since the index was introduced in 2001. The manufacturing sector is the most pessimistic where we all know the story about the falling Chinese export, but domestic demand is also getting weaker and weaker.

The well known CNY 4 trillion rescue package announced last year, that lifted the global equity market for several days, is still on the drawing board with many details missing. In the meantime the first rumours about budget shortfalls are circulating. Some mention numbers between CNY 500 – 800 billion, where a somewhat higher number is more likely. If you subtract the already planned investments that very funny were included in the CNY 4 trillion package, and also subtract the coming budget shortfalls (in 2009 and probably also in 2010), then most of the CNY 4 trillion are gone………

Peoples Bank of China last week warned about difficult times, and also high ranking Communist Party officials have said that difficult times are under way for China mainland.

Even journalists lately were upgraded with an allowance to indicate the economic difficulties, though not write the full truth yet.

Coming back to the equity markets. Hang Seng is not like many other indices because of the over weight of banks and property companies. But it did actually react on the lending comments from PBOC and the general negative impulses from US. I would say it reacted realistic to the news.

As the frequent reader have noticed do I believe that Chinese stocks will turnaround among the first and that China will be a domestic driven economy sometime in the future. But it’s too early to enter the market. In Shanghai B is a full effect from the CNY 4 trillion rescue package and an upturn in the mainland economy priced in. In reality is the rescue package getting diluted and the economic downturn is accelerating.

I continue to keep the 11.000 target in Hang Sang and the 90 target in Shanghai B, as I see Shanghai B 25% overvalued.

It requires a very strong Ox to change that economic downtrend as soon as priced in the stock markets. 

Targets: Hang Seng 11.000     Shanghai B 90

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