What’s up with the Selling in Chinese Stocks?

Chinese stocks continue to trend lower in China and in U.S. exchanges with the bear market in full force. If you own Chinese stocks, it has been a struggle, but I remain positive longer-term.

The benchmark Shanghai Composite Index (SCI) is lower than it was last month. The index of the 300 largest companies in China has broken below its previous sideways channel at between roughly 2,600 on the downside and 2,950 on the upper side to the current sub-2,300 level. It is clear that the speculators responsible for driving up the market have stepped away. And without the liquidity and speculators, any sustained rebound would be difficult at this time.

Chinese stocks are in a bear market, down a whopping 63% from the high of 6,124 and down about 57% from the close of 5,261 in 2007. The decline in the SCI is far worse compared to the declines in U.S. stocks, which pale in comparison. The larger decline in the SCI versus the U.S. indices should not be a surprise given the higher risk-to-reward on the SCI. The key was to take some profits when the SCI was surging in 2007.

Renewed concerns about a further slowing of the economy in China are pressuring stocks. China’s GDP growth has been slowing, but has been able to hold with double-digit growth. The fear in our view is that the near term is characterized by uncertainties in both China and the United States, a major trading partner. In China, GDP growth has been revised downwards due to the slowdown in the U.S. The Chinese government had been trying to curb economic expansion, but there appears to be a change on policy, as the country’s central bank, the People’s Bank of China, will ease funds for small- and medium-size companies that have been hard hit by the lower exports and credit issues. At the same time, the policy makers will need to be cognizant about high inflation in China, which stood at about 7.1% in June.

At this point, it is difficult to discern if the selling is over in China. We continue to see risk factors, including high oil prices and reduced consumer spending in other countries, which result in less demand for Chinese-made goods and hence profit pressures.

We have seen a concerted mass move to sell stocks. Our feeling is that given the credit and economic turmoil in the United States at this time, we continue to see high market risk in Chinese-listed stocks and advise prudence.

As far as U.S.-listed Chinese stocks, the impact has also been obvious and clearly evident. Chinese stocks listed here are struggling, but we believe the selling has been overdone to the point where we see some good buying opportunities emerging in Chinese stocks, specifically those of the small-cap variety.

And while the selling has been extreme, we remain cautious and advise speculators to take a look at buying value at the current price levels, although a bottom has yet to be established. We believe 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, as there could be more downside risk.