Communists propping up the market!

Shanghai (SHCOMP) recovered 1.4% today (to 2910.88) after dropping around 10% from peak, and 5.8% yesterday (NB – worst performance of any country index yesterday).

Well known ex-Morgan Stanley economist Andy Xie believes the index is set for a further 10% drop as banks reign in their lending.

Yunnan Copper halted trading yesterday after falling 10%.  The company reported a loss and said that it “sees no clear signs of recovery”.

I would like to point out that the Communist Party will celebrate 60 years of power this coming October.  The Government is unlikely to want a major slump in markets just before this milestone.  As a result I suspect some mechanism will be found to reduce downward pressure on the Chinese stock market. Perhaps once Xie’s fears pan out over the coming days it will be a good time to long the market before the celebrations commence.

Without a brokerage account (normally with high fees), China is not always an easy market to enter.  Here are a couple of more accessible instruments that provide exposure:

China Tracker HKG 2801
MUTF_CN:040002
INDEXAMEX:CZH.X

Shanghai – 10% down from the peak

Shanghai is down 10% from its high on the 4th August, as the commerce ministry commented that the Government’s CNY4tr stimulus package is probably not big enough to offset decreases in exports.

Why?
1. July export figures were 23% down yoy
2. New loans (CNY355.9bn) were a quarter of those lent in June.
3. The president of China Construction Bank Corp (Zhang Jianguo), the world’s second most valuable bank, said that the firm will cut new loans by 70% to avoid taking on bad debts.

Below I highlight some of today’s losses:
1. PetroChina (the worlds largest company): -5%
2. China Cosco Holdings (the worlds largest dry bulk shipping operator): -6.5%
3. Jiangxi Copper (China’s largest metal producer): -7.4%

It is interesting to note that exuberance for Chinese stocks has been so dramatic, that last week alone 660,000 individual trading accounts were opened.  This coincided with the end of a period in which IPOs were banned.

Look at the graph below of the Shanghai index – the drop off at the end is eerie.

Time for a little prudence in real estate names

Shanghai closed down for a 4th consecutive trading day – the longest negative trend in 2009.  The index is down 6.4% from its peak a few days ago on the 4th August.

The biggest losers were real estate and energy companies, as investors became concerned that loan growth would slow, and reduce power demand (see http://ravendragon.wordpress.com/2009/08/09/electricity-consumption-vs-gdp-growth/) and building.

As discussed in previous posts, first-half lending in China grew 300% yoy to a massive CNY7.3bn.  Too much liquidity opens the risks of an asset bubble.  In my opinion investors are correct to be prudent at this stage, and wait to see how the government continues fine-tuning monetary policy and flows before expecting upside in real estate and related names.

In addition, I would not characterize the market as a bubble, and feel the Government is correct in its ‘fine tuning’ policies and attempts to calm lending in 2H09 – i.e. this should prevent a bubble from fermenting

[Note-  the the Hang Seng ended on an 11 month high, with mainland banks recouping some of their recent loses on expecatations of earnings upgrades by analysts].

Vindicated! Shanghai loses 5%

Allow me this brief moment to rest on my laurels (I assure you I will only do so for a few minutes!).

Yesterday I asked whether at 26x p/e Shanghai was getting too expensive (see below) .  Today Shanghai closed 5% down at 3226.43 – its biggest drop in 8 months as investors began worrying whether the market rally had outpaced growth in earnings.

Shanghai – Getting expensive?

The market is at 26x p/e, and up 100% since November lows?

What do you think it means?

Another bubble in the making? What do you think?