Is It Time to Sell Chinese Stocks?

As Chinese stocks fall the question is if Chinese stocks are heading still lower. The Wall Street Journal reports on the turnaround of Shanghai Composite stock index.

After rocketing up last year to rank among the world’s top performers, China’s stock market has turned into a global laggard.

The Shanghai Composite has lost 7.2% since Jan. 26 and is down 2.9% for the year, making it Asia’s biggest loser. Among the world’s larger markets, only Venezuela has fallen more, with a decline of more than 9% as of Monday.

The market’s malaise results from a trio of factors: a deteriorating Chinese economy, concern that too much borrowed money has flooded into the market and a flurry of share sales that is sucking up cash.

Investors sold their real estate investment properties last year as the Chinese real estate bubble began to collapse. It is the flood of new stock market investors who drove up prices fifty percent in the latter half of 2014. Now many have decided that it is time to sell Chinese stocks and the Chinese market is heading south. As the Shanghai market weakens what has been happening to Chinese stocks listed as American Depository Receipts?

Chinese ADRs

We picked China Eastern Airlines Corp (CEA on the NYSE) to see how a Chinese ADR did during the run up of the Shanghai market. In July when the Shanghai market began its run up the CEA ADR sold for $15.41 a share. It peaked $26.32 on January 15 of 2015 and has fallen as low as $22.98 in the last few days.

China Eastern Airlines Corporation Limited is an air carrier operator in China. The Company provides civil aviation services, including passenger transportation, cargo transportation and mail delivery services.

The company signed a purchase order for 80 Boeing B737 jets in July of 2014 and is in expansion mode. The question is if expansion will continue as the Chinese economy falters. Is it time to sell Chinese stocks? What we should be watching is the overall state of the Chinese economy.

The Next Great Risk

Japan has fought deflation for nearly a quarter of a century and aggressive austerity measures are threatening recession and deflation in Europe. The Financial Post believes that China is the next great risk for a deflationary world.

China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years that they cannot deflate a credit bubble safely.

A year of tight money from the People’s Bank and a $250-billion crackdown on shadow banking have together pushed the Chinese economy close to a debt-deflation crisis.

The surprise cut in the Reserve Requirement Ratio – the main policy tool – comes in the nick of time. Factory gate deflation has reached 3.3%. The official gauge of manufacturing fell below the “boom-bust” line to 49.8 in January.

Is it time to sell Chinese stocks? Anyone who has made money in the last months and years in Chinese stocks probably wants to take a little money off the table, so to speak. The old saying is that you do not have a profit until you take a profit. And, as the Chinese economic growth miracle starts to look like it is in for a big reset, many may simply choose to sell out entirely and hold cash, which is the best asset to have during deflationary times.

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