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In a report published Monday, the second largest brokerage firm in China is predicting that the Shanghai Composite Index, currently just under the 3,000 level, should see a retreat to 2,500 before recovering later this year. The reason -- the continuing tightening of credit by the Chinese authorities to prevent the economy from overheating. According to the report:

Inflation accelerated to 2.7 percent last month and urban fixed-asset investment rose 26.6 percent in January and February, the statistic bureau said last week. That compares with the median estimates of 2.5 percent and 25.6 percent in a Bloomberg News survey, respectively.

These measures are certainly positive for the long-term well being of the Chinese market, but what are the implications in the short term for U.S.-listed Chinese small caps?

In fact, as time and again pointed out in this blog, there is scant correlation between the Shanghai Index and our China OTC Index. Where the Shanghai Index has retreated almost 10% this year, the China OTC Index continues its climb to return approximately 15% year-to-date. With greater coverage of these small caps, as evidenced by the recent Rodman & Renshaw conference in Beijing and the upcoming ones by Roth Capital and RedChip, more and more investors are going to hear the stories behind some of these gems.


Not to mention that reporting season is underway. One bellwether stock -- IFM Investments a.k.a Century 21 China (NYSE:CTC) -- announced its FY2009 results Monday. Some highlights are as follows:

-- Net revenue was US$95.5 million, a 138.4% increase from FY2008.

-- Net income was US$19.8 million, compared to a loss for FY2008.

-- Net operating cash flow was US$25.2 million.

What is even more impressive, SG&A actually fell in 2009, compared to 2008. Sure, the stock retreated upon announcing its earnings, but that probably had more to do with the company's projection of its FY2010 Q1 revenues, which is traditionally a slow quarter.

Another indicator stock, given its broad-base reach, is China MediaExpress (OTCPK:CCME), which will be announcing its results Tuesday. We will certainly be monitoring that very closely.

Perhaps it is too early to generalize, but the reporting season so far has not generated any unpleasant surprises, as far as our China OTC Index stocks are concerned. Barring any unforeseen development, and given the exposure through investor conferences and the recent buying momentum, I would go as far as to say that the next couple of weeks will continue to be positive for our index as a whole.

In other words, the decoupling with the Shanghai Index will even be more pronounced, at least in the short run. The bottom line is, our bullish sentiments remain securely in place.

Disclosure: None.