July 20, 2011 (Chinavestor) News that China's GDP strengthened for the third month in a row sent investors cautious on the Mainland, fearing that more monetary tightening will follow. The Shanghai Composite Index (SHA:000001) made a comeback in the afternoon session, trimming losses to a mere 2.8 points or 0.1%. But the picture was different in Hong Kong where investors got clues from the U.S. where bulls grabbed the horn of the market. The DJIA advanced 202.3 points or 1.6% with all but three of its components ending the day in the black. The broad rally in the U.S. helped push the Hang Seng Index (INDEXHANGSENG:.HSI), the main gauge of the city state, back to above the 22,000 level. Large caps did well in Hong Kong on Wednesday, boding well for the iShares FTSE/Xinhua China 25 Index (NYSE:FXI). Stocks that took beating the last week were the strongest for the day. China Mobile (HKG:0941) surged 3.0% while BYD Company (HKG:1211), Buffet backed electric car maker, jumped 3.7%.
Another evidence that investors were taking on more risk is evidenced by the performance of the largest Chinese gold miner, Zijin Mining (HKG:2899). The stock lost 5.7% in Hong Kong, making it the worst performing component of the Hang Seng index (INDEXHANGSENG:.HSI). A-shares of the same company, listed on the mainland, shed 3.1%, the most among the 50 largest components of the Shanghai Composite Index (SHA:000001).
Large cap stocks enjoyed a broad rally in Hong Kong for the day. All but four components of the Xinhua 25 China index advanced, financials and undervalued industrial taking the lead. Given that the iShares FTSE/Xinhua China 25 Index (NYSE:FXI), the most liquid Chinese ETF, follows the performance of the Chinese index very closely, chances are that the ETF will do on the NYSE as well.
But gains were not limited to large caps. Smaller stocks enjoyed a somewhat less universal but broad rally as well. Stocks that advanced outnumbered those that fell four to one among components of the index underlying the Guggenheim China Small Cap ETF (NYSE:HAO).
If components of the Hang Seng Index (INDEXHANGSENG:.HSI) can serve as proxy for ADR trading, outlook is best for China Mobile (NYSE:CXL) and China Eastern Airlines (NYSE:CEA). Given the strong momentum Chinese internet stocks have enjoyed this week, more upside is likely before the earnings season kicks in in China.The weakest link may be CNOOC Ltd. (NYSE:CEO) and China Unicom (NYSE:CHU) if trading in Asia of components of the iShares FTSE/Xinhua China 25 Index (NYSE:FXI) were a proxy.