Chinese shares are facing ‘credit crunch’

Chinese shares look set for a short-term rebound, but for the medium and long term, the weakening economy weighs on their performance. One analyst even talks about a “credit crunch.”

Technical analysis shows “considerable support” for the Hang Seng China Enterprises, the Hong Kong stock exchange index that tracks the performance of the Chinese companies in the form of H-shares.

H-shares are stocks in Chinese companies that are regulated by mainland Chinese law but trade on the same terms as other shares listed on the Hong Kong stock exchange. They offer foreign investors a way to invest in China’s biggest companies.

Chinese shares seem undervalued when compared with other stocks, with a price/earnings ratio of around 7, so they are tempting for investors right now.

Analysts at Austrian bank Raiffeisen say that technical analysts shows the 200-day moving average and the last low “seem to provide a considerable support” for Chinese shares, although market breadth is still low.


Chinese shares look like a short-term opportunity. Source: Raiffeisen research.

The chart shows that “chances for a rebound are not that bad” for Chinese shares. However, investors should watch the support at 10,150 carefully, the Raiffeisen analysts said in a recent report.

Bullish confirmation is needed at between 10,570 and 10,850 to enter a long position.

However, over the longer term, the slowing economy does not bode well for Chinese shares, despite their historically moderate valuation.

The analysts at Raiffeisen also calculate a proprietary Economic Indicator for China, based on monthly data. It has a lead against gross domestic product figures, which are published quarterly.

It is calculated based 40% on monetary policy indications and 60% on real economy figures. The China Economic Indicator ranges between +1, which shows a trend that is above long-term and -1, which indicates a trend below the long term.

China economy indicator

China’s economy indicator pointing to further downturns. Source: Raiffeisen research.

Currently, the indicator holds at -1, which shows further deterioration and a new low point. Both monetary policy and the real economy have deteriorated.

Albert Edwards, an analyst with Societe Generale renowned for his bearishness, says that two key Chinese data have “escaped close investor attention” in the past week.

One of these is the fact that consumer price inflation in China has fallen to 1.6% in September from 2%.

“Clearly, China too remains at a deflationary precipice,” Edwards says.

The second piece of data that is important in his opinion is the $100 billion decline in Chinese foreign exchange reserves in the third quarter, the largest quarterly fall ever.

“This reflects deterioration in Chinese competitiveness from its excessively strong real exchange rate and a deterioration of its balance of payments,” according to Edwards.

He also believes that slower growth in foreign exchange reserves represents monetary tightening – as it strengthens the Chinese currency – and therefore “a decline of this order of magnitude is like a credit crunch.”

Edwards is known for making headlines for his extremely bearish stance, so maybe his remarks should be taken with a pinch of salt.

It is true, however, that investors should think carefully before taking a dip in Chinese shares.

On the one hand, they are cheap and tempting for the short term. On the other hand, as the data shows, Chinese shares may be cheap for a reason.


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