— “Calling the Trend” Column, by George Leong, B.Comm.
China, which has historically been known as a country of savers, is beginning to look more like other industrialized countries as far as debt goes. Financial institutions in China have been pushing credit cards and, according to the “South China Morning Post,” debts from credit card surged 126.5% year-over-year in 2009. According to the People’s Bank of China, over $1.0 billion of debt on credit cards was overdue by greater than six months in September. Compared to the U.S., the amount is not significant, but the fear is the rapid rise. There are estimated to be about 175 million credit cards in China.
But there are now some problems arising in China that could pressure Chinese stocks. There is some fear surfacing in China of a bubble and overheating on speculation that some Chinese banks were ordered to halt lending for the remainder of the month due to excessive credit. The benchmark Shanghai Composite Index (SCI) fell 2.9% on Wednesday with the fear that the slowing Chinese economy could impact global economies. The Chinese government suggested that it would tighten monetary policy to avoid overheating. Watch this, as it is a concern, especially with the Chinese stocks. Expect some turbulence in the short term in light of the potential changes.
As far as the Chinese stock markets go, the SCI is managing to hold above the psychological level of 3,000, but is lagging in 2010, down nearly four percent so far in January.
On the chart, the SCI has breached below its 20-day moving average of 3,215 as well as its 50-day moving average of 3,228. The SCI has now moved below a key pivot point at 3,306 and, with the break below the short-term moving averages, there is some concern of selling in the near term if the index fails to 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 the 200-day moving average at 2,972. A drop below this could drive the SCI down to 2,712, last encountered in September 2009.
With the SCI gaining 80% in 2009, there is increased fear of another correction due to some bubble-like conditions in certain areas in China, such as real estate, banking, and stocks. Unlike the U.S., there have yet to be banking issues in China; but, if there is some fragility, Chinese stocks could be set for some intense selling sometime in 2010.
We will monitor this; in the meantime, you need to be careful when adding positions and you should definitely realize some of the profits you have made on Chinese stocks. Or at least set some stops to prevent a major setback. If you are up 100%, take profits on 50% of the position and let the remaining half ride. Under this scenario, you would essentially play with free money.