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China shares drop in Asia, expect weak opening in the U.S.

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pre-616-tumbShares of Chinese companies listed in America fell on Monday following a weak U.S. manufacturing report. Fears that the global economic recovery may take longer than expected drove American indices lower along with Chinese ADRs. Commodities fell dragging oil companies lower. CNOOC Ltd. (0883.HK: Quote, Profile , Research) (CEO: Quote, Profile , Research), PetroChina (0857.HK: Quote, Profile , Research)(PTR: Quote, Profile, Research)(601857.SS: Quote, Profile , Research) and Sinopec Corp (0386.HK: Quote, Profile , Research)(SNP: Quote, Profile, Research) (600028.SS: Quote, Profile , Research) lost over $3 each. Overbought Shanda (SNDA : Quote, Profile, Research) and Ctrip.com (CTRP: Quote, Profile , Research) lead the NASDAQ listed China stock decline. But weakness was universal only four Chinese ADS managed to eke out some gain.

Negative market sentiment carried over to Asia where the Nikkei fell 2.9%, its biggest drop in points since March. Hong Kong pared better by shedding 333.46 points or 1.80% to 18,166.50. This drop is almost as bad as of June 8 when the Hang Seng fell 426 points or 2.3%. The fall was universal with only one Hang Seng component managing to eke out some gains. China Unicom H shares fell 5.9% followed by CNOOC Ltd's 5.5% loss. Ping An Insurance lost 5.1% on a Citi downgrade while China Life fell 1.7%.

Trading in Shanghai was not as bad as in Hong Kong. The Shanghai Composite Index <.SSEC> fell 13.53 points or 0.5% to 2,776.02 points, basically erasing Monday's gains. China's domestic stock exchange proved to be much more resilient to global fluctuations but this time China A shares got their own problem: the resumption of IPOs. Chinese authorities announced plans to reinvigorate IPOs on the back of the strong performance of the index. The Shanghai Composite is up 51% YTD as abundant liquidity caused by record bank lending helped lift Chinese shares. But the IPO resumption chills the spines and brings back memories of 2004-2005 when large Chinese companies sucked up all liquidity sending the index to all time lows. But corporate earnings and macro economic indicators suggest China is on track to recover fast from the slump, so don't bet on much weakness in the index.

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Looking at China ADRs from a technical point of view, the last two trading sessions has clearly made an impact. China stocks don't look overbought anymore, a dramatic change from last week. While most China stocks are trading above 20-DMA and 50-DMA, the relative strength indicator is now neutral suggesting China stocks are ready to resume rally should market sentiment in Wall Street improve. But with index futures pointing to a slightly lower open on Tuesday early morning, prospect of a China stock rally is slim today.



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