Wednesday, July 8, 2009

Yuan auction falls short, China stocks due for correction

On the road today updating from my handheld again and feeling incredibly cool and sophisticated, all while reinforcing the popular belief that we are indeed way too dependent on technology these days.

Here are two short excerpts from different Bloomberg articles which shed some light on the true health and capacity of the Chinese economy. What should you take away if you decide to click through to Bloomberg and read the entire articles? Basically that China is a economic powerhouse and still has room to grow. Likewise, it is not a cure all to the woes of the global economy.

This is important to realize because the government in China will do all it can to produce good economic news, sometimes misleading the international investment community. But hey! Most countries do too. ChinaSouthAmerica, as it always does encourages readers to form own opinions and always try to read in between the lines.

1) China Debt Auction Falls Short as Central Bank Tightens Policy

China failed to complete a 28 billion yuan ($4.1 billion) government bond sale for the first time, as the central bank withdrew cash from the financial system to reduce inflation pressures.

The Ministry of Finance sold 27.5 billion yuan of one-year notes at a yield of 1.06 percent, compared with 0.89 percent at the last auction of similar-maturity debt in May, according to Chinabond, the nation's biggest debt-clearing house. Later, the People's Bank of China it said will resume the sale of one-year bills tomorrow after an eight-month suspension.

"The failure to sell all government bonds in an auction is quite rare," said Nie Shuguang, a fixed-income analyst at Industrial Bank Co. in Shanghai. "Investors are worried the central bank will fine-tune its monetary policy and drain capital from the financial market."

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2) China Stocks Set for 'Sizable Correction', RSI Shows

Chinese stocks may be headed for a "sizable correction" after a so-called momentum indicator for the Shanghai Composite Index advanced to the highest in at least five months.

The 14-day relative strength index, or RSI, for the Shanghai Composite climbed to 83 this week, above the 70 threshold that signals to technical analysts an asset or market is poised to fall. The indicator compares the magnitude of recent gains to losses. The last time the Shanghai gauge's RSI breached the 80 level, in February, the stock measure sank as much as 13 percent in following two weeks.

"The RSI shows that the market is in a pretty overbought situation," said Barole Shiu, a Hong Kong-based technical analyst at UOB-Kay Hian Ltd. "If history repeats itself, there's a very strong chance we'll see a sizable correction."

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