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What This Weeks Shanghai Index Drop Means For Our Portfolios
What This Weeks Shanghai Index Drop Means For Our Portfolios

It seems for now the world is watching China as a benchmark to compare the remaining global markets. The fact is they have developed into the main financier for the U.S. Now more than ever, China is receiving globally recognition which in turn is increasing their importance in the eyes of institutional investors. On Monday’s session, China 's Shanghai Index declined 6.7 percent. This has the U.S. futures on the defensive and everyone is wondering if the China is leading the way to a downside. I believe China’s markets are not steering us towards a downturn and that the recent drops will not have a lasting effect if it gains traction on the Mainland market.

Some of my long-term subscribers may remember my comments several years ago when our market reacted to the fall of the Soviet Union. What does the fall of Kremlin have to do with corporate profits in U.S.? The answer was nothing and next day our markets rebounded and never looked back. This time China may have more impact on market than ever before in our financial history, but I don't think it will have an enormous impact for more than a few days or maybe a few weeks.

I also have suggested that were no new uncertainties that could trigger a major decline other than a geopolitical situation or maybe a complete meltdown of the Chinese markets. I have personally looked at the charts on China and it looks like they are approaching some major support levels with extremes just about 200 points lower. Also, it appears they are correcting a 109 percent gain and the volatility may continue to unnerve market participant, but no crash is imminent. With that being said, our view still remains that there are more risks in the Mainland markets than in China ADRs traded here.

Committed To Your Profits In China,

Jim Trippon
China Stock Digest


China Closes its Wallet
China Closes its Wallet

Look Out Below as China Closes its Wallet

China’s relentless growth hasn’t revived the global economy, but it has helped the shares of many resource companies rebound far more than market averages this year. But the party may be coming to an abrupt end.

China has been on a resource-buying binge, scooping up world supplies of oil, coal, iron ore, aluminum, copper, nickel, tin and zinc. That has driven up the prices of key commodities at a time when the global recession should have been pulling commodity prices straight down.

China’s immense resource appetite has done wonders for shares of resource producers like Freeport McMoRan (FCX) which has seen its share prices jump by more than 100% this year despite America’s economic crisis. Rio Tinto (RTP) is up more than 70% on the strength of Chinese consumption and Chinese interest in buying a larger stake of the company. Other mining giants like BHP Billiton (BHP) and Anglo American plc (AAUK) are up more than 20% despite the recession.

As we warned in the July issue of the China Stock Digest, it may be time for investors to pare any holdings they have in resource companies which interests in iron ore, aluminum, copper, nickel, tin and zinc. A strong warning that China is about to close its wallet now comes from the enterprising Chinese publication called Caijing.

Caijing says a key state planning official has signaled a halt to government buying of copper, aluminum and other high-value metals because prices have risen too high. “We don't anticipate that the country will continue to build its reserves,” said Yu Dongming, the head of the metallurgical department of the powerful National Development and Reform Commission (NDRC).

That could mean a plunge in commodity prices worldwide and repercussions for shares of resource miners and refiners.

Alarm bells are already ringing in Australia which has been one of the few countries to enjoy an increase in exports due to aggressive buying by China. The Brisbane Times warns that a decline in exports to China would ripple throughout the Australian economy. BHP Billiton is Australia based and Rio Tinto has major operations in Australia.

In another ominous sign, Australian miners and the Chinese steel industry have failed to agree on new contract prices this year. Contracts of this type have never been allowed to lapse in the previous forty years.

Alcoa (AA) and other bauxite miners and refiners may also be on the endangered list as a stockpiling binge by Aluminum Corporation of China appears to have hit its peak.

It all adds up to one more sign that China is in the driver’s seat economically. America may still have the world’s largest economy but China has the cash to call the shots.

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Committed To Your Profits In China,

Jim Trippon


China Stock Digest

Nine China Stocks to Avoid during Obama’s First 100 Days
Nine China Stocks to Avoid during Obama’s First 100 Days

We've all heard that the market hates uncertainty and we're now facing a period of unprecedented change and uncertainty. The inauguration of our new president may or may not help bring about a recovery in America's ailing economy. We can never predict what will happen in the long run. But in the near term, there's no question that we're facing a period of extraordinary volatility.

The new president will face enormous pressure from his own party to clamp down on what many see as unfair trade practices by Chinese industry and by Beijing's  own politicians. Calls for stern measures against Chinese exporters are nothing new on Capitol Hill. But now, with America's recession deepening and China's economy still on steroids, the pressure on President Obama to strike out against China will become enormous.

Democratic politicians in particular will be looking for action against China as a form of political payback for union support during the election. The Democratic complaint is sweeping, running from currency manipulation to the doling out of illegal subsidies to export industries. Even members of the outgoing Republican administration have joined in the action against some Chinese industries and that means some Chinese stocks will also feel the effect.

In one of her last acts as U.S. Trade Representative, Susan Schwab filed a major complaint with the World Trade Organization. She claimed that Beijing illegally aids exporters of a wide variety of products with tax rebates, cash grants and discounted loans.

Schwab's action and the potential of further measures by the Obama administration may or may not be approved by the World Trade Organization. But, whatever the outcome, there's no doubt that many Chinese exporters are operating under double jeopardy. They face a severe recession among their customer nations and they face the prospect of trade sanctions from the WTO. That means they'll be dangerous companies for investors to own for the foreseeable future.

We at the China Stock Digest have steered clear of most export-related Chinese companies for a long time, but some companies and some industries are in particular jeopardy during this time of global change and crisis.

The biggest threat faces China's booming steel industry. While U.S. steel mills have been shutting down, Chinese smelters have been exporting millions of tons of steel products to the United States. China's exports almost tripled last year and the U.S. International Trade Commission has already levied duties on some steel products.

Most of China" mainland steel companies have already been discounted and most trade only in Shanghai. But other sectors face looming troubles, including textiles, shipping, toys and apparel. They're the biggest recipients of tax rebates, government handouts and other favorable treatment which may attract negative actions attention from U.S. authorities

Here's a list of stocks that we think deserve special investor caution in the early days of the Obama administration:

· General Steel Holdings, Inc. (GSI)

Once a hot stock, General Steel Holdings has lost 75% of its value since its peak only six months ago. Fears about overcapacity as well as U.S. sanctions give this company little chance of a speedy recovery.

· Aluminum Corporation of China (ACH)

The world's largest aluminum company, Alcoa is in big trouble, shedding thousands of jobs, closing smelters and facing a possible debt crunch. China's growing economy won't save Aluminum Corporation of China as global metal prices fall due to the pressures of the worldwide financial crisis.

· TBS International Limited (TBSI)

TBS International is an ocean transportation services company that's having trouble keeping profits afloat as worldwide trade goes into decline. The company depends on traffic through trade routes between Latin America and Japan, South Korea and China, and as we all know, everyone in the export business from China is feeling the pressure of plummeting volume and declining revenues.

· Seaspan Corporation (SSW)

Seaspan faces many of the same challenges as TBS International. This containership company still produces a big dividend, but there's no certainty that its dividend is safe as revenues drop sharply.

· China Linen Textile Industries (CTXIF)

Remains in double jeopardy as trade sanctions and demand declines loom over the firm's bottom line.

· China Premium Lifestyle Enterprise, Inc. (CPLY)

China Premium sells luxury apparel, a specialized line of products that could be the first to be hit as global financial crunch hits the high end of the market.

· Jingwei Textile Machinery Co. Ltd. (HKG:0350)

Jingwei has seen its profit margin go suddenly negative as the era of expanding demand for textiles from Asia comes to an end. China's textile machine companies will be among the last to recover from the decline in demand for finished products.

· Texhong Textile Group Ltd. (HKG:2678)

With eleven factories producing cotton, Texhong is still spinning profits but we remain nervous about sustained demand in companies beyond its Chinese customer base.

· Goldlion Holdings Limited (HKG:533)

Goldlion is seeing its profit margin drop as apparel demand worldwide comes under pressure and the threat of trade sanctions looms.

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Committed to your PROFITS from China,

Jim Trippon,

Editor in Chief

China Stock Digest

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