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China shares jump in Asia on stock index futures

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advance3 March 26, 2010 (Chinavestor) Chinese shares advanced all over the board in Shanghai and Hong Kong on Friday following final regulatory approval for stock-index futures, short selling and margin trading.

The Shanghai Composite Index (SHA:000001) completely reversed course from yesterday and advanced +40.54 points or +1.34% to 3,059.72 on Friday. Each and every component but one out of the SSE-50 index, representing the largest 50 stocks listed in Shanghai, advanced. Industrial and Commercial Bank of China (SHA:601398), the largest financial institution in the world, reported 2009 financials including record lending and profits. But shares of the company advanced a modest +0.6% only after Chairman of the company, Jian Jianqing, indicated that the company needs to replenish capital following a record $161 billion in lending in 2009.

Trading was similar in Hong Kong. While the day started out slow in the morning the afternoon session caught fire on the introduction of index futures, sending the Hang Seng Index (INDEXHANGSENG:.HSI) 274.56 points or +1.32% higher to 21,053.11. Investor optimism was more grounded however, stock with in-line or weak earnings were not lifted: China Unicom (HKG:0762) (NYSE:CHU) and Petrochina Co. Ltd. (HKG:0857) (NYSE:PTR) continued to slide. Shares of Chinese airliners remained explosive: China Eastern Airlines (HKG:0670) (NYSE:CEA) jumped +4.8% followed by China Southern Airlines (HKG:1055) (NYSE:ZNH). Chinese coal companies outperformed; shares of China Shenhua (HKG:1088), the largest Chinese coal miner, advanced +4.0% while smaller rival Yanzhou Coal (HKG:1171) (NYSE:YZC) rose +3.7%.

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Chinese stocks listed in American exchanges are expected to benefit from the significant rally in Asia this morning. Investor optimism is expected to carry momentum stocks higher but ultimately large cap stocks will benefit from the introduction of index futures. Reason being that large cap, liquid stocks will make up most of the volume in the futures markets increasing trading volume on the traditional exchanges. Increase in volume is expected to drive stock prices higher over the long run.

Chinese ADRs have lost short term momentum lately, measured by the decreasing number of China stocks trading above 20-DMA and 50-DMA. The number of oversold stocks is on the rise while number of overbought ones declined. Even the less volatile relative strength index (RSI) is deep into negative territory.

But this is about to change today. Expect smaller cap, volatile stocks to jump and large caps to advance. Baidu.com (NASDAQ:BIDU) is not overbought - one potential explosive stock for the day. Chinese airliners, Yanzhou Coal (NYSE:YZC) and China Telecom (NYSE:CHA) are expected outperform on Friday, just to name a few. For a stock specific breakdown, please read today's overbought/oversold report - and make sure to click on the title of the first article to read full version of it. http://chinavestor.com/technical-analysis/overboughtoversold.html

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Another indication that China ADRs will do today in American exchanges is the divergence of the FTSE/Xinhua  Index ETF (NYSE:FXI) from the Shanghai Composite Index (SHA:000001) and the Hang Seng Index (INDEXHANGSENG:.HSI). American listed Chinese stocks always catch up with their Asian listings, eliminating current discrepancies.

Another important development is the surge in U.S. Treasury bonds. Most of it is due to the weakness of the euro as Greece's ills still hurt the common currency. It is imperative that while FED Chairman Mr. Bernanke reassured that low interest rates are needed to keep the economy growing, appetite for U.S. Treasures mount.

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