China's stock market rebounded Tuesday from a sharp sell-off
in the prior session after the government announced a hefty
increase in defense and domestic security spending to support
economic growth. Beijing also said it aims to maintain the
country's economic expansion at 7.5% this year.
The national defense budget will be raised 10.7% to $119
billion and domestic security will be lifted 8.7% to $124
iShares FTSE China 25
), tracking 25 blue chip stocks, popped 0.95% after tumbling
1.76% to a three-month low the day before. It's corrected 9% from
a 52-week high, which is considered a normal pullback. It's
trading near a 38.25 buy point in a first-stage, cup-with-handle
base from which it broke out in December.
SPDR S&P China (
) climbed 1.26%.
Market Vectors China (
) gapped up 2.7% to nearly regain its 50-day moving average,
which would confirm a solid uptrend.
Guggenheim China Small Cap (
) jumped 1.4%, regaining almost all of its losses from the prior
session. It's fallen only 4% from its 52-week high, which is seen
as a healthy pullback in an uptrend.
Guggenheim China Real Estate ETF (
) was flat after gapping down 3.2% Monday in heavy volume. It's
corrected 8% from its 52-week high, within a healthy pullback
range in an uptrend, especially after it rallied a whopping 59%
last year and doubled off of its 2011 bear-market low.
But its IBD Accumulation/Distribution Rating has deteriorated
from a healthy B rating to E -- the lowest possible -- over the
past five weeks. That shows institutional investors quickly went
from heavily acquiring shares to dumping them.
are trading above their key 200-day moving averages, indicating
they're in a weak uptrend.
Real Estate Controls
China's stock market and U.S.-traded shares plunged Monday
following the government's move to cool down the red-hot real
estate market. In an effort to control housing inflation and
speculation, Chinese officials said Friday they will enforce a
20% capital-gains tax on profits from home sales.
They also said they would make banks require bigger down
payments and charge higher mortgage rates for second-home buyers
in some cities.
Leaders are worried about possible social unrest as real
estate is unaffordable for the middle class. Home prices in
China's 100 largest cities rose for a ninth straight month in
. They rose 2.5% from the year-ago period. For the top 10 cities,
home prices climbed 4.3% year over year in February.
Why Buy Chinese Stocks Now?
Some asset managers say the sell- off was overdone and
expected a quick rebound.
"According to our head of China equities, the measures were
not totally new, nor unexpected," Khiem Do, who is based in Hong
Kong as head of Asian multi-asset strategy at Baring Asset
Management, said in an email. "How the authorities will implement
those rules is another issue altogether."
He recommends buying stocks outside the real estate sector
that "offer steady growth at a reasonable valuation." Investors
must be careful about buying property, construction and building
products because some areas are overbuilt.
"There are a growing number of so-called ghost towns, empty
apartments, offices and shopping centers all over China," Do
The property sector will be volatile for a few weeks as
investors get clarity over what the announced measures will
entail, said Michael Reynal, the new portfolio manager for RS
Emerging Markets and RS Greater China funds.
At the same time, a new crop of national leaders start taking
office this week. Reynal is considering buying companies with
positive earnings growth that have fallen to historically cheap
China's ghost towns will fill up quickly as people from
agricultural areas increasingly move to the cities, Reynald said,
adding that Chinese investment demand will support property
prices because investors have few other investing options.
The measures "do not seem to have affected developers' plans
on new starts and completions," Barclays wrote in a client note
Monday. Developers have managed to sell 60% to 80% of their
apartments within two to three months of the pre-sales
The outlook for first-time homebuyer demand for smaller
apartments remains robust, and inventories in some areas have
fallen from their January 2012 peak.
"Most developers are maintaining their new starts and land
purchase plans and requesting acceleration of permits from the
local government for new developments," Barclays wrote.