By Sean Geary
The Shanghai Composite (NYSEARCA:FXI) traded substantially lower on Thursday, ending the day down more than 2%. Is now the time to take a chance on this struggling exchange?
Most Asian markets fell on Thursday as fears over the health of the European economy festered. The Hang Seng (NYSEARCA:EWH) was off by 0.8% and the Nikkei 225 (NYSEARCA:EWJ) was down 1.3%. However, down 2.8% Thursday, the Shanghai Composite continues to underperform its Asian peers on both good days and bad. While other Asian exchanges traded lower as a result of fears over Europe, Chinese stocks bore the brunt of bearish news on the domestic front in the banking sector.
Beijing's decision to put in place additional curbs on banks' wealth management products is likely to affect revenues, according to an analyst at Citic Securities. Consequently, banks tumbled in Shanghai today: China's largest private bank, Minsheng, was down more than 6%, while the Industrial and Commercial Bank of China and China Construction Bank (OTCPK:CICHY) were both off more than 2%.
After today's move lower, last week's brief rally in the Shanghai Composite on the back of Tom DeMark's call and a solid reading from HSBC's Flash Manufacturing PMI seems like a distant memory. The downtrend that began at the market's peak in early February remains intact.
China's benchmark exchange is now in danger of breaking material support at the 100- and 200-day moving averages. As of Thursday afternoon, the Shanghai Composite was only 30 points above its 100-day and 60 points above its 200-day. If the Shanghai Composite were to break through these levels, it would appear as if a test of its November lows would be in the cards.
While value investors may be inclined to take a chance on China at these levels, it's important to remember that China hasn't traded on valuation in a long time. Until a secular change occurs that eliminates some of the opaque practices of Chinese companies and compels the Chinese retail investor to jump back into equities in a meaningful way, as well as significant growth in the Chinese economy, it's tough to envisage Chinese firms trading at normal valuations.