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A case for Petrochina and the CAF

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advance7(Oct. 5, 2009 - Chinavestor) There are two factors driving Chinese stocks since March 2009. Strong performance of American equities and blockbuster economic indicators from China. And while the future direction of the U.S . market is a big question mark following a strong Q3 really, solid economic and related news continue to pour from China.

The latest reading on manufacturing activity, released on September 30, suggest that there is no slowing down in China. However it was the remarks of Yi Gang, Deputy China Central Bank Governor, that investors have to pay attention. Asked if the pickup in lending in August is a cause for a concern, Mr. Yi replied that "I think overall, the situation will converge to a sustainable level". This is a very important piece of information indeed. This means that the Chinese government will keep lending loose, even if it risks asset price inflation. This in turn means that the liquidity that propelled the Shanghai Composite up over 90% in the January -August 4 period, is not dying up. As soon as Chinese retail investors realize this, the Shanghai index is expected to resume a very strong rally well past the 3,200 level.

Just a quick market history of 2009. After the government introduced a Yuan 4 trillion ($576 billion) stimulus package last November, the Shanghai Composite started to creep up from 1,719 points on November 3, 2008, and with smaller bumps along the road peaked at 3,471 on August 4, 2009. But then a rally was coming to an end for two reasons.

SHI_09_Sept

 

  1. For one, a corrections was timely as we and many other have just predicted - see our article on Aug. 12, 2009 Don't panic. China stock correction was timely.
  2. And for two, new lending, e.g. liquidity, took a dive in July, sending chills through the spine of Chinese retail investors, who abandoned the market just as fast as they came. This broad sell-off send the Shanghai Composite tumbling 20%.

But here is the key looking forward.  for one, the correction took care of excessive growth. And for two, new lending picked up in August, as money supply rose by a record. Now that the Central Bank have given multiple signals that loose lending is here to stay, there is nothing to hold the Shanghai Composite back. The good news for U.S. investors is that there is one Chinese ETF that is designed to track the Shanghai Composite very closely - the Morgan Stanley China Fund (NYSE:CAF). This ETF closed at $31.58 on Monday, down 13.8% from its peak on August 4, 2009. So should the Shanghai Composite resume a rally after the Chinese holiday is over, expect the Morgan Stanley China (NYSE:CAF) to give intelligent investors a 10% plus gain.

Now, if you like to play stocks, PetroChina Co. Ltd. (NYSE:PTR) is a Shanghai Composite heavy weight and one of the favorites of Chinese retail investors. This in turn means that chances are that PetroChina (PTR) will have a couple of good days, assuming the above mentioned scenario holds true. PetroChina Co. Ltd. (NYSE:PTR) closed up $3.28 or 2.99% on Monday but has plenty of room left should Shanghai firm up as expected.



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