China Approves Roads-to-Subways Construction; Stocks Surge
Comment of the Day

September 07 2012

Commentary by Eoin Treacy

China Approves Roads-to-Subways Construction; Stocks Surge

This article by Jasmine Wang for Bloomberg may be of interest to subscribers. Here is a section:
Growth in gross domestic product may rebound next quarter as the investments filter through, Nomura's Zhang said. The timing of the announcements also shows that the government wants to boost confidence as the projects had been accepted previously, he said. The new road projects, which include highways in Zhejiang and Xinjiang provinces, were approved as early as June.

“China's central government finally took real actions to arrest the worsening slowdown,” Bank of America Corp. economist Lu Ting said in a note. “Adding home supply and improving urban infrastructure are the two best ways to contain home prices, speed up urbanization and increase social welfare.”

Anhui Conch Cement Co., the nation's biggest cement-maker by market value, rose by the 10 percent limit in Shanghai, the most since July 2010, to close at 15.07 yuan. Sany Heavy Industry Co., China's biggest construction-equipment maker, also jumped 10 percent. Second-ranked Zoomlion Heavy Industry Science & Technology Co. rose by the same amount in Shenzhen.

Lonking Holdings Ltd., which makes wheel loaders and road rollers, surged 20 percent in Hong Kong, the most in almost four years, to close at HK$1.21. Builder China Communications Construction Co. rose 6.1 percent.

Eoin Treacy's view

My view – China's austerity measures were self imposed as monetary authorities intervened to prevent a further expansion of the property bubble and to remove the 2009 stimulus. It has been our view that as credit conditions tightened, excesses were squeezed from the system and valuations improved. As a result the case for a reversal of policy was becoming progressively stronger.

There have been tentative signs for a number of months that the Chinese authorities were moving towards a more accommodative stance. These have ranged from lowering transaction taxes to a modest decline in the value of the Renminbi. These measures did little to bolster confidence in the stock market.

One of the reasons for this is because the bank, industrial and materials sectors account for almost 65% of the CSI300's market cap. While consumer oriented sectors have increased their weighting considerably over the last few years they are still a long way from exerting influence on the performance of the wider market. Therefore measures to promote infrastructure development are most likely to have a motivating influence on investors.

At today's close the CSI300 Index had formed an upside weekly key reversal and is challenging the four-month progression of lower rally highs which forms a portion of the more than three-year downtrend. Some additional follow through next week would help bolster confidence, but a sustained move above the 200-day MA is the minimum requirement to suggest a return to demand dominance beyond the short term.

As the perception of the Chinese authorities' willingness to support the domestic economy improves, the repercussions are likely to have global significance. The H-Share Index failed to sustain the downward break this week and rallied back up into the overhead trading range. A countermanding downward dynamic would now be required to check potential for some additional upside. The Hang Seng has held a progression of higher reaction lows since early June and a sustained move below 19,000 would be required to question medium-term scope for additional upside.

I reviewed the industrial metal complex on Monday and the respective metals have all continued to rally. BHP Billiton is an S&P Europe 350 dividend aristocrat yielding 4% and reconfirmed its three-month progression of higher reaction lows with an impressive rally yesterday. A sustained move below 1750p would be required to begin to question medium-term scope for continued higher to lateral ranging. Rio Tinto found support at the lower side of its almost yearlong range and posted an upside weekly key reversal. A countermanding downward dynamic would be required to check potential for additional upside. The Blackrock World Mining Trust is currently trading at a discount to NAV of 6% and has also formed an upside weekly key reversal. It is challenging the short-term progression of lower rally highs and a clear downward dynamic would be required to question potential for a successful upward break.

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