Keep an Eye on Your Chinese Holdings

“Calling the Trend” Column, by George Leong, B.Comm.

The benchmark Shanghai Composite Index (SCI) is managing to attract some support at just below 3,000, yet it is still down about eight percent this year. The recent correction was driven by concerns of a real estate and credit bubble forming in China and the decision of the Chinese government to halt lending by banks. The action is feared to hurt economic growth in China, but, at the same time, it may be the right move to avoid a financial collapse in the country. We feel that the fact the SCI is holding at 3,000 reflects the support for the move.

On the chart, the SCI is currently at a critical point, just below its 20-day moving average (MA) of 3,034 and its 50-day MA of 3,145. The index is hovering at its 200-day MA of 3,018, so watch to see if it can hold. Watch, as the trend since November 2009 when the SCI traded at 3,361 has been negative. The next level of support the SCI will need to hold at is 2,890. A drop below this could drive the SCI down to 2,712, last encountered in September 2009.

So far in 2010, China has underperformed U.S. indices. The SCI is down 7.91% as of February 12, worse than the 3.6% decline in the S&P 500. Our Chinese stocks, while losing some ground, continue to show some strong gains. We remain long-term bullish on China, but watch for short-term volatility.

On a positive note subject to the tighter bank lending orders, the People’s Bank of China suggested that it would “gradually guide monetary conditions back to normal levels from the counter-crisis mode” in its quarterly monetary policy report, according to Bloomberg. In January, bank lending in China surged to $203.5 billion, up from $55.6 billion in December, although the pace of lending did slow sharply towards the end of the month.

While there are concerns of a bubble brewing in China, the International Monetary Fund feels that there is no serious risk of asset bubbles and that China could see GDP growth of 10% in 2010, according to “The Wall Street Journal.”

So, where are we now? I continue to consider China as the land of opportunity for investors looking for added growth and a boost to their overall portfolio returns. The returns can often be spectacular, as we saw in 2009, but also keep in mind that investing in Chinese stocks listed on U.S. and Canadian exchanges can add high risk. So, while this is the case, the opportunity for above-average gains more than compensates for the added risk.

The key to investing in China and other emerging markets is maintaining diversification in your portfolio across domestic and foreign stocks, and across sectors and market caps.