After suffering losses over seven consecutive trading days,
Chinese shares have finally rebounded. Financials and real estate
stocks have powered indices to their best trading day in two
months. The major driver behind the rebound was an assurance from
the nation's central bank that it would ensure sufficient
liquidity was maintained in the economy.
The Shanghai Composite Index increased 1.5% to reach 1,979.20
points. Additionally, the CSI 300 Index, which reflects the
performance of 300 stocks on the Shanghai and Shenzhen stock
markets, gained 1.9%. For both indices, this was the largest
percentage gain over a day since April 24. Over the second
quarter these indices have lost 12%.
China's credit squeeze has been troubling its markets to an
alarming degree recently. As the People's Bank of China firms up
lending standards in order to rationalize its banking system,
short-term pangs are beginning to be felt.
The idea behind such a move is to reduce risks in a credit market
where many companies are over-leveraged. Further, there is huge
dependence on informal lending. Several businesses which cannot
apply for formal loans utilize this as a regular source of
financing. It has been estimated that such loans could amount to
4 trillion yuan or $650 billion. This is equivalent to nearly 7%
of the nation's total credit.
But stricter credit norms have led to concerns that the country's
nascent recovery from an economic slump could decelerate. Growth
has already declined to 7.7% in the first quarter, compared to
7.9% in the previous quarter. The central bank's actions may lead
to growth falling even further moving ahead.
Such fears have led Zhou Xiaochuan, governor of the People's Bank
of China, to assure markets that sufficient liquidity would be
maintained in the system. Speaking at a financial forum, he said
that several measures would be used to maintain suitable
liquidity levels "to ensure the overall stability of the market."
But even if growth does decline, it is unlikely that it will fall
to 2 or 3%. This is because, despite the state of the credit
market, most Chinese companies are productive, unlike the
Indonesian and Thai companies which were hit by the Asian crisis
of 1997. Year after year now, China has continued to move higher
on the Global Competitiveness Index of the World Economic Forum.
Even more crucial is the fact that the Chinese government is
willing to make hard decisions in order to achieve a more
sustainable model of growth. Premier Li Keqiang has emphasized
that growth cannot continue without radical reforms. And he as
well President Xi Jinping have acknowledged the state of the
banking system and promised to change the lending environment.
This is why Chinese stocks remain good long-term options. We
suggest five such picks, all of which hold good Zacks Rank.
Computer based testing services provider
), financial services company
Noah Holdings Ltd
) and telecom company
China Unicom (Hong Kong) Ltd
) are the first of these, all of which hold Zacks Rank #1 (Strong
The first two have nearly identical expected earnings growth of
25% and 24.9%, respectively. The forward price-to-earnings Ratios
(P/E) for the current financial year (F1) are 15.39 and 13.95.
The third, China Unicom, has expected earnings growth of 42.03%
and a P/E (F1) of 17.43.
Next up we have
Bitauto Holdings Ltd
SouFun Holdings Ltd
), both of which hold Zacks Rank #2 (Buy). Both these companies
provide internet based marketing services to the real estate
sector. Expected earnings growth for these companies is 20%, and
27.96% respectively. The P/E (F1) figures for these companies are
12.92 and 10.05.
Despite the short-term weaknesses the Chinese economy is
exhibiting now, it remains an excellent prospect for the future.
So this may be a good time to add these stocks to your
ATA INC-ADR (ATAI): Free Stock Analysis
BITAUTO HOLDNGS (BITA): Free Stock Analysis
CHINA UNICOM (CHU): Free Stock Analysis
NOAH HLDGS LTD (NOAH): Free Stock Analysis
SOUFUN HLDG-ADR (SFUN): Free Stock Analysis
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