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Three Reasons to Think Twice About Chinese Equity


Central bankers need to get on the same page.


I wanted to follow up on the China piece I penned on July 29th with a few tidbits that have come out over the last few days. These should make investors think twice about the ramifications to the Chinese equity market.

1. On August 7th China's Vice Finance Minister stated the government will monitor asset prices and create an "internal mechanism" to stabilize their stock market.

Translation: We will be your designated driver and get you home lest we let you crash the car (again).

Strangely, the very same day, at the very same briefing, Su Ning (a deputy governor of China's central bank) said the central bank won't consider asset prices when adjusting policies. She went on to say "It's not the policies that will be fine tuned, but the focus, intensity, and pace of policies that will be fine tuned."

So we have the finance minister saying the central bank is looking at -- and is concerned enough about -- the ramifications stemming from the stratospheric move in the equity market to admit their needing to implement policy to address it. Meanwhile, at the very same time a central bank official is saying they won't consider asset prices when making such a policy. Good thing they're on the same page.

2. In an interview with Bloomberg news on August 6th, China Construction Bank Corp's President Zhang Jianguo said that the nation's second-largest bank will cut new lending by about 70 percent in the second half to avert a surge in bad debt.

"We noticed that some loans didn't go into the real economy," Mr. Zhang said in an interview with Bloomberg News on Thursday at the bank's headquarters in Beijing. "I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast."

They noticed some loans didn't go into the real economy? Say it isn't so!

Riddle me this: If China was recovering in a sustainable manner from the grips of a serious gut-check in growth, why would the second largest bank in China be worried about bad debt resulting from new loans?

3. On August 6th individual investors opened more than 700,000 accounts to trade stocks last week, the most since January 2008.

It's a good thing the loans Chinese officials initially said they weren't worried about going into their equity market isn't having an effect on laymen "investor" psychology. I think the number speaks for itself.

I should also mention that January 2008 was also the month where the massive double top setup took place on the DJ Shanghai Index. The DJ Shanghai also experienced a buying climax last week. A buying climax occurs when a stock, index etc. makes a higher high than the previous week but closes below the previous week's close. These usually occur after a significant run and are most powerful within the context of a volatile and wide percentage ranging week. The opposite is the case for a selling climax. See the weekly chart where I've denoted the instances.

Click to enlarge

Not a prediction, just an observation. Asian culture is truly fascinating on several levels. That being said, there is a reason Macau has prospered.

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