The Shanghai Composite Index (SCI) has been in correction mode after retrenching about 20% from around 5,500 in mid-January to the current 4,300 as of Thursday. The degree of the selling to below several key moving averages represented a major correction and a potential trend reversal, although it is still too early to affirm that a reversal is in place. The selling should not have been a surprise to you, as I have constantly been saying that Chinese- listed stocks were overextended, bubble-like, and extremely vulnerable to market shocks and selling.
The selling in Chinese stocks listed in China was driven by a combination of factors, including Chinese subprime concerns, a potential slowdown in the United States, and nasty winter weather. Investors in Chinese stocks need to be worried about the possibility of a slowdown and/or recession across the Pacific, since reduced spending in the U.S. would drive import demand down from Chinese companies, negatively impacting China’s exports.
Coming off a spectacular return of 97% in 2007, the SCI is down about 13% at this juncture, which is above the decline in key U.S. indices. This should not be a surprise, as stock markets that rapidly grow are vulnerable to more significant selling.
As the subprime issue is a major risk in the U.S., there are also reports of subprime problems in China. The Bank of China, a major holder of subprime mortgages in Asia with about $7.95 billion in exposure, may be at risk for major write-downs.
There has been a concerted mass move to sell stocks. My feeling is that, given the credit and economic turmoil in the United States at this time, there continues to be market risk in Chinese-listed stocks. A slowdown in the U.S. economy and consumer spending could easily translate into less demand for Chinese-made goods, hence potentially sending a ripple effect through the Chinese economy.
As far as U.S.-listed Chinese stocks go, the impact has been obvious. Chinese stocks listed here are struggling, but I believe that the selling has been overdone to the point where there are good buying opportunity emerging in Chinese stocks, specifically of the small-cap variety, which have also been hammered by selling in small-cap stocks.
I believe that the selling has been extreme and advise speculators to take a look at buying at the current price levels, although a bottom has yet to be established. The reality is that Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors, yet you also need to be careful and be diversified in your portfolio.