At the moment, I’m increasingly cautious towards Chinese stocks that are listed in China. Here is why. While the stock markets in the United States and Canada are seeing much-needed profit taking surfacing over the past few weeks, the same cannot be said for the benchmark Shanghai Composite Index (SCI), which jumped another one percent on Tuesday to another record close.
In my view, the speculation in China is a red flag. The Chinese government has been trying hard to cool down the sizzling GDP growth that came in at over 11% in the recent quarter along with the wild speculation that is driving the stock markets higher. The stamp duty on trading stocks was increased to 0.3% from the previous 0.1% to try to curb speculation, but it is not working.
Investors in that country, a vast majority of which are unsophisticated, are emptying their saving accounts and partaking in the stock market. Remember that China has one of the highest savings rates in the world, so this shifting of capital is a concern.
The Chinese central bank also said that it would increase its benchmark lending and deposit rates in an effort to stem inflation and help slow down the stock speculation. But this is not working and that is a concern.
Even all of the recalls that are happening to Chinese goods are barely impacting the stock markets in spite of the fact that they could negatively erode revenues and earnings at some Chinese companies.
At this time, Chinese stocks listed in China remain extremely vulnerable to selling. Now, you should realize that if investors suddenly decide to cash out, it could set off a bout of selling and leave Chinese markets vulnerable.
The bottom line is that China will continue to be an excellent area for growth investors, but you just need to be careful at this time and be well diversified in your portfolio.