Chinese stocks: Buy on the dips

Reorient Financial Markets, an Asia-focused investment bank, says, “Buy on the dips” and Asia Unhedged agrees.

The 4% drop in the Hang Seng China Enterprises Index (HSCEI) on Friday is a buying opportunity, said Reorient in its April 19 weekly preview. The drop came after the Securities Association of China expanded short selling in the Chinese markets, while banning margin financing through umbrella trusts

“These are rational and responsible measures on the part of Chinese regulators, consistent with the overall reform effort to improve transparency and efficiency in China’s financial markets, although they may be painful in the short-term,” said the report.

The moves are expected to hurt local investors, but really who cares?  This is all about bringing foreign money into China, especially since so many Chinese are sending assets to the West to buy real estate and other ways to lock in their wealth. Reorient says this could bring in several hundred billion dollars of demand for Chinese stocks after they join global benchmarks.

Reorient values the trailing price-earnings ratio of the HSCEI at 10.3, half that of Euro Stoxx (21.6) and a bit more than half that of the S&P 500 (18.4).

After the Reorient report came out, the Chinese central bank threw a little more fuel onto the bullish fire. On Sunday, the People’s Bank of China cut the bank reserve-requirement ratio by a full percentage point to 18.5% for large banks.

This decreases the amount of deposits banks need to hold in reserve. And if it’s not in the banks that means this money can now flow into the stock market.  The cut was twice the size expected by analysts, and is the most aggressive move by the bank since 2008.

Despite the stimulus, after an initial bounce, the HSCEI ended Monday’s session down 2.9%

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