Shanghai composite bounces off 4 year low as new leadership meets

Its a topsy turvy world for Chinese stocks right now. The Shanghai composite index rallied 2.8% today, after dropping to a near four year low earlier in the week after a meeting of China’s new leadership team implied that they would be ready to take action over the next few months to support economic activity. They also talked of the need for stability and a renewed focus on urbanization, potentially demanding more stimulative measures such as infrastructure spending. Another factor behind the bounce was China’s Insurance Regulatory Commission (CIRC) was reported to have lifted its limit on insurers to invest in banks, boosting Chinese bank stocks significantly.

Yesterday U.S. listed Chinese stocks were hit hard as the Securities and Exchange Commission (SEC) began to crack down on Chinese affiliates of the top four U.S. accounting, namely, Ernst & Young, Deloitte,  KPMG and Price Waterhouse Coopers. The SEC has taken action after the accountants failed to produce fully audited documents and to cooperate in a fraud probe, despite the fact that the auditors claim that Chinese law prevents them from agreeing to the SEC’s demands. If a compromise cannot be reached there are several companies at risk of being delisted from the U.S. market exchanges. The SEC’s action adds to the misgivings of investing in Chinese equities listed on the North American market after a catalogue of accounting scandals revealed over the last few years.

The new Chinese politburo now needs to follow up action with words to add conviction to today’s relief rally in a market which looks cheap but can’t seem to consistantly shake off the negativity.

Contrarian Investor UK