China Feeling the Pinch of High Energy Prices, But Does Value Remain?
China’s shares have continued to drift lower in line with global stocks. On one hand, this could have been surprising since China’s central bank is cutting interest rates while the rest of the world’s other central banks are moving towards a rate hiking cycle. So, what is the likely path here for China’s shares and where is a place of value to potentially buy?
The case for buying
The case for buying China’s shares over the medium/longer-term remain. Around the start of the year, we highlighted the opportunity:
These pro-growth China policies remain in place.
The reason for recent selling
The recent falls in China’s shares have been for a number of reasons. Firstly, the GDP target for China is 5.5% this year. Oil prices have been soaring and this creates a problem for China. China imports around $250 billion worth of oil each year. So, on one hand, that could be a reason for some of the downside. Higher energy prices would pressure global consumers and reduce the demand for Chinese produced goods. Chinese businesses will face a profit squeeze and that is what is being felt in Chinese stocks right now. How hard is the squeeze to the global consumer and how long will this last? The tangible question is how much of a hit will China’s GDP take? 0.5%, 1.0% or more?
Reasons China can manage with higher oil prices
15% of China’s oil comes from Russia. The boycott of Russian products and potentially a deep boycott of Russian energy could help China negotiate some cheaper prices. Also, China’s crude oil and natural gas are fairly well diversified. Furthermore, according to Lian Weilang of the National Development & Reform Commission, a ‘very high’ share is on longer-term contacts. So, the domestic picture may not be so bad.
Near term support for China’s 50 shares
The near term support at 14500 has broken. That was a key level and an obvious one for buyers to lean against. See here for previous post. However, the case for medium-term upside for China’s shares remain and the following level should be a key support level. Stops can also be managed very tightly to mitigate against one of the weaknesses of trading global macro fundamentals.