U.S. Worries Spread to Chinese Stocks

With China now becoming the most important trading partner with the United States, supplanting Canada, shocks in the U.S. economy will surely move across the Pacific and impact China. The benchmark Shanghai Composite Index is down 38% from its 52- week high of 6,124 and down about 28% in 2008 to its lowest level since June 2007.

The degree of the selling to below key moving averages represents a major correction and trend reversal. The selling should not have been a surprise to you, as we have constantly said that Chinese- listed stocks were overextended, bubble-like, and extremely vulnerable to market shocks and selling.

The selling in Chinese stocks listed in China has been driven by a combination of factors, including Chinese subprime concerns as well as a potential slowdown or recession and credit problems in the United States. The issue is that investors in Chinese stocks are concerned that a slowdown across the Pacific would reduce spending in the U.S. and drive import demand down from Chinese companies, negatively impacting China’s exports. Evidence of this was reflected in January as China’s trade surplus with the United States declined 6.7% year-over-year to $12.1 billion. China did see a 5.4% jump in exports to the U.S. but this was offset by a 12.2% increase in imports from the U.S. into China.

We believe that the selling is not yet over and could result in additional losses down the road, as the market deals with the slew of market risk including surging oil prices that recently broke above $110.00 a barrel. With China a major user of energy, the high prices could impact growth in the country and profits of Chinese companies.

We have seen a concerted mass move to sell stocks. A major reason for the rise in Chinese stocks was driven by unsophisticated speculators in China. When they panic and sell, the floodgates could open and we could see more downward moves.

My feeling is that, given the credit and economic turmoil in the United States at this time, we will continue to see market risk in Chinese-listed stocks. I advise prudence.

And while the selling has been extreme, I remain cautious, but advise speculators to take a look at buying value at the current price levels, although a bottom has yet to be established. I believe that Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors, yet you need to be careful and be diversified in your portfolio.