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China shares up on government action

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advance6(Sept. 8, 2009 - Chinavestor)  Shares of Chinese companies extended their rally in Shanghai and in Hong Kong on Tuesday following news that the Chinese government plans to issue government bonds for Yuan 6 billion ($879 million) to increase the "international status" of the currency. Expectations rose that the time is nearing when China will let its currency float and open its domestic market up for international investors. When that happens, Chinese ADRs will get a significant uplift based on current valution mismatch between Shanghai and the rest of the world.

The fact that the bond auction takes place in Hong Kong helped boost investors sentiment in the city, taking it as a sign that the former colony has an increasingly important  room in China's capital structure development. Many investors have feared that Shanghai is going to take over Hong Kong as the financial hub for China, but current developments point to a direction that both has its own place under the sun.

The Hang Seng Index advanced 440.5 points or 2.14% to 21,069.81 in a strong rally. Stocks that advanced outnumbered those that fell 10:1. Resource and metal players did well, H-shares of Aluminum Corp. of China (HKG:2600) and Yanzhou Coal (HKG:1171) gained over 3% each. Telecoms and airliners were the weakest sectors on Tuesday.

Looking ahead, S&P and NASDAQ index futures point to a higher open for Tuesday, setting a poitive tone for Chinese ADRs. As the following screen testifies, monetum has started to come back for China stocks. The number of China ADRs trading above their 50-DMA is on the rise yet the number of overbought is still limited. This in turn means a bullish sentiment for the China stock universe.

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Chinese indices and their tracking ETFs show that the Shanghai Composite came off the oversold position and is ready to keep going higher. The Morgan Stanley China Fun (NYSE:CAF) is following the developments of the Shanghai Composite very closely, and is expected to do well. But the action on Tuesday was in Hong Kong, where the Hang Seng Index jumped over 2%. This in turn makes a strong case for the iShares FTSE/Xinhua 25 index Fund (NYSE:FXI). As the overbought/oversold screen shows, The FXI has ground to make up, just as is for Claymore/AlphaShares China Small Cap ETF (NYSE:HAO).

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