Hot Topic: The US blames a weak yuan for a surge in imports of Chinese tires, etc.
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SHARES OF Chinese exporters are expected to encounter headwinds this week due to the likelihood of renewed pressure on the Chinese yuan to appreciate, especially from Washington.
SMEs with a heavy reliance on external demand are expected to take a harder hit if the US officially declares China a currency manipulator.
PRC-based stock market specialist Mr. Bradley Gardner of China International Business said that mid-caps were especially vulnerable to a possible declaration because they were more likely to have all or most of their eggs in the export basket.
Chinese stock markets are closed today for Tomb Sweeping Festival and reopen for trade on Tuesday.
Decoupling is Hard to Do
Washington says it is delaying its decision on whether China intentionally keeps its currency devalued to maximize exports until an upcoming G20 meeting has adjourned.
"Chinese small caps might have a hard time this week as the news out of Washington is that the Treasury will delay its 'World Currency Report’ past the original April 15 due date in deference to a number of high level political meetings,” Mr. Garder told NextInsight.
He added that the delay points toward a “guilty” verdict on the yuan’s value.
“This will most likely be taken as a sign that progress has been made in talks about appreciation. That, added to a continued tightening of the Chinese housing market, will most likely be taken as a sign to buy FXI (iShares FTSE/Xinhua China 25 Index) — the most well known Chinese ETF, all large-caps, weighted towards financials — and sell HAO (Claymore/AlphaShares China Small Cap ETF) — a popular small cap China ETF — if not to lighten exposure to China in general.”
However, he said the medial is overplaying the risks.
“Investors are advised to buck any bearish trend on China stocks over the coming few weeks, particularly in small caps. Thus far property sector reforms — which would seriously affect HAO — have been toothless, and a number of analysts have been suggesting that they will remain so.“
Banks may soon bid farewell to lendophilia.
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He said that if the US names China as a manipulator, it will likely be tempered for economic and political reasons, and that both economies were too interdependent to raise the specter of a full-out trade war.
Though this would not prevent the bears from urging selling on export-reliant counters this week.
"Even if something significant happens on the RMB front — which I believe is currently an unlikely prospect — its effect on the exports sector will likely be minimal.
“As Goldman recently put it in a report ‘Despite this set of supportive fundamental arguments, we sense that Chinese equities have fallen off investors’ radars somewhat, positioning is light, and sentiment is, at best, skeptical, making us all the more keen to get involved.’ Now is a good time to look for an entry into your favorite China stocks.”
He added that with the taps tightened on bank lending of late, this would effect financial institutions sooner rather than later.
“Now that the government has stopped the lending spree, and headlights have been targeted on the massive amount of local government debt held by some banks, financials seem even more difficult than they were previously.”
Therefore, the discriminating investor with an eye for sustainable practices in the sector might mean banks might see an upward blip this week.
“This gives an opportunity to search out balance sheets and see which banks took out less risk than others, and which are likely to need a government bailout by year-end. Nomura has recommended Bank of Communications (Bocom) because of strong collateral on its government liabilities.
“The stock grew an impressive 10% last week based on a strong Q4 report, but could continue its trend for a few weeks yet.”
Related story: MONDAY CHINA MARKET OUTLOOK: Big banks buoying bourses
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