A special edition about the Chinese stock market as I find this the most interesting and might offer the first true opportunities.

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China:

Hang Seng (18972)  Shanghai B (129)  USD/CNY (6,8320)

China is more than interesting – will the stock market mega rebound or go into a black hole ? Automobile sales is worth to watch in any country as it tells more about the health of the state than any speach from an official. The August carsales shrank 6,3% y/y to 629.000 vehicles so the September number to be released in the near future will be watched very closely. China is actually the second largest carmarket in the world but the expected sale of 10 million units this year will be missed. It’s another indication that the Chinese middle class is under pressure, and with good reason.

Private individuals can save in 3 different ways in China, deposit money in the bank at a very low rate, buy A shares or buy their own property. The deposit solution would have been the best but not very sexy and surely not for Chinese private investors. The way to generate wealth during the last years have been thorugh the booming equity market (you could buy blindly). With the 70% drop since October last year that wealth generator disappeared for the middle class.

They are not stupid in the Communist Party so the intervention in the domestic Chinese stock market last week serves several goals. Partly to stabilise the banks from sliding further down, but surely also to comfort equity investors and get some wealth feeling back. Another concern is the Chinese real estate market as too many reports about refinancing problems for property developers circulates – partly as a natural consequence of declining real estate prices and volume. The worst effect is the depressed wealth feeling among private households and less the negative effects on the banking sector.

The financial institutions will explore bigger losses, but probably will only a few come into troubles on that account. The nonperforming loan ratio of private mortgages went up from 2,37% by end 2007 to 2,56% in June this year. Not so worrisome as the real estate-related lending has an average of 24,08% among the 14 listed banks (1 bank is above 40%) and the average down payment when individuals buy homes is 37,2%. To ease frictions in the Chinese economy a more flexible financial system is needed and that might be clear for the Chinese leaders as well. A few days ago a conference was held in Beijing, where Wu Xiaoling, vice-chairwoman of the Financial and Economic Committee of the National People’s Congress spoke and argued to “lift excessive regulatory restrictions”. I take it as a sign that much will be done to bring growth and the wealth feeling back to private households.
What should the investor do now ? Believe that official China will win the battle and send equities higher or will the dropping housing market kill the last wealth feeling and the banks ? I have mentioned several times that the rebound in stocks will come in Far East where China naturally has a part in that game. I thought that China would intervene (or similar support actions) at a higher level around 150/155 in Shanghai B, which was the reason for the rebound target to 185, but now we rebound from the 105/110 level to 130. A new drop to 115 starts to look attractive, but it’s not a buy recommendation yet. As mentioned in a couple of mails earlier, is PPI rising faster than CPI which is a problem for corporate profits and partly caused by state controlled price limits.

But all in all we have a Chinese government that intervenes in the equity market, is ready to accept higher inflation (helps corporate profits short term) and to deregulate the financial market. I would look for stocks within some retail sectors, maybe 1 or 2 banks, production of special equipments, some utility, drugs, agricultural sector as a start. The time to execute is during Q4.
The target at 19.500 in Hang Seng was more than reached as the low was 17.650, but in a wild session and we are now trading around the target at 19.500. Right now I continue to be bearish on equities as you have noticed, so 18.000 in Hang Seng and 115 in Shanghai B are the next targets.

Targets: Hang Seng (18000)  Shanghai B (115)

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