Chinese stock market after the U.S. interest rate cut

As the 23rd of January started in China, a surge of anticipation and excitement took over the feelings of despair and impending doom. Poetic imagery indeed, and it even has a ring of truth to it. More likely the collective held breaths were let out and nervous tensions eased a bit, after the U.S. Federal Reserve cut rates a massive .75 point on the first trading day of the week following the Martin Luther King holiday. The rate cut helped buoy they U.S. stock markets which had opened 450 points down, to only have lost roughly 1/4th that amount by the close.

The impact has been felt on the other side of the planet, and China has rebounded well in the early trading. The Shanghai Composite Index move sharply in the first 5 minutes of trading to gain nearly 2%, ending a 6 day plunge that has totaled some 17% off the Index. Hong Kong Monetary Authority has followed the U.S. Fed dropping rates to 5% from 5.75%, and Chinese banks were expected to do the same, though not necessarily as deep a cut.

Several sectors performed well in the wake of this action. Mining stocks, and particularly those with gold, stood out with better than average gains. This is no doubt due to the combination of continued demand from India and China, the weaker Dollar, and the hedge that gold provides in instable and volatile markets.

BHP Billiton Ltd., the worlds largest mining stock had a dramatic start rising more than on any single day in the past 2 decades already. Bank of China Ltd. was also moving ahead after posting a profit that reversed the expected loss due to sub-prime mortgage loans.

Expectations of a further .25 basis point cut from the Fed at it’s month-end meeting helped to fuel further gains, and increase speculation about the future of the U.S. markets.

Now take a moment to absorb all that.

The Chinese markets have felt the same pain that the world markets have endured, and the relief that America has brought. But that relief may well be conditional and temporary. As mentioned, expectations are for an addition rate cut in the coming days are high, and the future outlook on the American economy is murky at best at this moment.

According to Marvin Fausto, Manila-based chief investment officer at BDO Unibank Inc.,

“Until economic data show the U.S. is out of a recession, sharp gains in equities will not be sustained.”

Add to that the mystery of the Chinese banks losses from sub-prime loans, because Chinese banks aren’t required to announce those losses until April, and things look even shakier.

“We don't have a good read" on the current value of mortgage holdings at Bank of China and other Chinese lenders, said Charlene Chu, a senior director at Fitch Ratings China.”

Now add in the fact that China will allow, on a trial basis, commercial banks to own stakes in insurance companies. And don’t forget the Olympics are coming mid-year.

What do you get?

That is the current state of Chinese stocks. One thing that can be presumed is that the potential recession woes of the United States is far from over in its impact on the world markets. Continued losses due to bad mortgage loans, high oil prices and a rush to gold are all going to have major impacts on the global economy.

PetroChina may well have a bounce that extends further into the year, and mining stocks can see continued interest from hedges with gold and the increased demand from India and China. Financials and insurance may get further interest as banks seek to acquire positions, offsetting potentially bad loans and adding assets to their balance sheets. Transportation, communication, and service industries are still all expected to have a boost from the Olympic games.

Considering the volatility in the world markets so far in the first month of the year, 2008 will keep everyone on their toes.