China Tells

China’s Equity market (H) went through a decent correction during the last week. This is the second consecutive week of a down market. From a recent high of 22,000 in the first half of April, Hang Seng has corrected almost 10% to 20,000 (See Graph on the top left).

The fear started from a series of government action to cool down the property market. The share prices of the property developers were heavily hit. To follow is the continuous effort from the central bank to tighten the monetary condition. During this week People’s Bank of China announced that they will increase the Required Reserve Ratio (RRR) by 0.5 basis point for deposit taking financial institutions. Such a hike is the second time in 2010. CHINATELLS is of the view that PBOC probably would continue to increase the RRR for another two to three times during the year. However, a rate hike (currently 5.31%) looks unlikely until at least Q3 unless the CPI increase grows out of control.

If China government’s measure of monetary tightening and crack down on property sector can best be described as progressive, the saga unfolded in Europe is by contrast far more violent. Despite the fact that European Union and IMF have on principal passed the proposal to bail out Greece with a three year loan of 110 Billion Euro, the market seems not convinced of the credibility of the bail out package and the outlook of peripheral economies in Europe. The bond yield and CDS on not only Greece, but also Portugal, Spain and Ireland all soared to new highs. At the same time the equity market in almost all the regions went through a severe correction from Japan, Australia, to Asia and Europe. It is not easy to identify now whether the drop of Hang Seng index during the week is more due to the government tightening or the Greece debt crisis, or maybe a bit of both.

CHINATELLS is dubious about the effect of Greek debt problem on the equity market in China. The most remote link that one can think of, is a subdued demand for Chinese goods from Europe, and a knock-on effect on the growth of China’s economy. Given the fact that China’s top export destination now is not Europe any more, the impact of such a link is in question. This leads CHINATELLS to believe that any sell off due to the panic from Europe could be a good opportunity for investors to go back to the market, following a ‘sell on rumor, buy on fact’ strategy.

A big concern for China’s share market, as always, is the capital raising requirement from the Banks. In addition to the 60 Billion USD capital hole that the big banks (including ABC) keep reminding the investors, it seems that some other smaller fish (Hua Xia, Everbright for example) are keen to join the party too. CHINATELLS feel that the market probably has already discounted the coming capital raising need to a large extent, and it is unlikely that such raising would put on any more weight on the market.

On the other hand, however, the macro environment of Chinese equity does not look as friendly as 2009. The over aggressive growth rate, especially if Q2 continues to post unexpected highs, is definitely not good news for the stock market. CHINATELLS is of the opinion that the equity market of 2010 probably would be more in a range bound market rather than any big bull trend.