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Strong economic news drive China stocks

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bounce_back(Sept. 11, 2009 - Chinavestor) The moment of truth, at least for the short term, got revealed on Friday after a slew of economic data rolled out of China. August factory output rose 12.3% from last year, the fastest in the last twelve months. Retail sales grew by 15.4%, the most in 2009. Inflation was 1.2% lower than in August 2008, keeping a lid on liquidity concerns. Urban fixed-asset investment, a measure of the property market, grew by 33% in the first eight months of the year, a very healthy reading. But exports to the U.S. fell 21.8% from last year, indicating that the recovery is China based. Altogether the reading was very positive, sending the Shanghai Composite (SHA:000001) up 64.91 points or 2.2% to 2,989.79.

The positive reading kept Hong Kong shares on a winning streak, the index is up seven days out of eight trading days in September. The Hang Seng Index advanced 91.86 points or 0.44% to 21,161.42 points by the close. Hong Kong listed H-shares of China Unicom (NYSE:CHU), China Mobile (NYSE:CHL), China Life Insurance (NYSE:LFC) rose, suggesting a strong open for the ADRs. But airliners, China Eastern Airline (NYSE:CEA) and China Southern Airline (NYSE:ZNH) fell in Hong Kong after strong gains for the week.

Looking at the Chinese ADR universe from a technical point of view, the picture is rosy. With most China stocks on fire, 20 ADRs are trading above their 50-DMA, the tone is positive, yet only one China ADR is overbought. The relative strength indicator is still muted, signalling additional upside potential lays ahead.

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Looking at Chinese indices and trailing ETFs, the upside is limited for the iShares FTSE/Xinhua 25 Index (NYSE:FXI), the PowerShares Golden Gragon (NYSE:PGJ), and the Claymore/AlphaShares China Small Cap ETF (NYSE:HAO). This assessment is based on the fact that these ETFs tail the Hang Seng Index and looking at them from a technical point of view, they're right at the same position as the Hang Seng close this morning.

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