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China stocks continue the slide in Asia on Wednesday

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decline Jan. 27, 2010 (Chinavestor) Shares of Chinese companies continued the slide on Wednesday in Asia - the Shanghai Composite Index fell -32.79 points or -1.09% to 2,986.61. This marks the first time the gauge slipped under the 3,000 level in three months. Hong Kong's major benchmark, Hang Seng Index (INDEXHANGSENG:.HSI), shed -76.26 points or -0.38% to 20,033.07 at the close. The index is down six days in a row now and has tumbled -1,644 points or -7.6% since January 19.

Losers from Tuesday bounced back off - airliners and Tsingtao Beer (HKG:0168) but metal and mining stocks continued to bleed. Maanshan Iron (HKG:0323) tumbled -5.2%, Aluminum Corp. of China (HKG:2600), the largest Chinese aluminum maker, fell -3.4% while Zijin Mining (HKG:2899), the largest gold miner in China, fell -2.9%. Angang Steel (HKG:0347), top tier steel producer, shed -2.6% on Wednesday.

 

The picture was very similar in Shanghai. Metal stocks and financials dragged down the Shanghai Composite Index to 3 months lows. Investors fear that lending curbs will hurt demand for construction materials such as steel, and will dent into the profitability of banks.

The sharp correction of the Chinese equity markets to efforts cooling China's economy brought back the bears - some predicting the Shanghai Composite to slip below the 2,800 level: China’s Shanghai Composite May Drop to 2,800, Good Hope Says. Or another article China 200-Day Moving Average Drop ‘Ominous:’ Technical Analysis says that "China’s Shanghai Composite Index fell below its 200-day moving average for the first time in two years, signaling further declines for the benchmark measure, according to Schaeffer’s Investment Research.".

We couldn't disagree more with such basic assessments of the situation. The weakness is a reaction to the measures by which the Chinese are trying to curb lending thus fighting inflation and avoiding asset price bubbles. When a major economy grows by 10.7% in a quarter or 8.7% for a year, as is the case with China in 2009, current tightening measures are well taken. Given that we have entered into earnings season, corporate earnings will justify higher valuation for Chinese companies in a matter of week. This is when bears will give way to the bulls again: so don't expect the Shanghai Composite to slip below the 2,800 level.

Index futures are mixed ahead the open in the U.S. Investors are going to digest earnings from Boeing, UAl, Norfolk Southern, and Caterpillar among others. Given that the DJIA is way oversold, a bounce back may come at any time.

Looking at Chinese ADRs, or Chinese stocks listed on American exchanges, the bounce back is just as likely. The number of oversold Chinese stocks jumped to 16 while only one China ADR is overbought. The Technical measures of Chinese ADRs says it all - buy into weakness!

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