Chinese Equity Breakout as S&P Signals Negative Credit Metrics for China

China has been trying to hold its own. The obvious growth shows how dependent the nation is upon exporting finished goods to the United States, Europe, and elsewhere. Standard & Poor’s is keying in on the weakness in China and there are some serious issues to consider. This report is just that much more interesting because it comes at a time when the iShares FTSE China 25 Index Fund (NYSEMKT: FXI), one of the key ETFs for Chinese stocks, is trying to stage a breakout (see chart below). What appears to be underway is a possible situation where fundamental and technical analysis signal two very different outcomes.

S&P’s report is titled “Emerging market Credit Metrics: Ratings Trends in China Turn Negative.” The report is from the Global Fixed Income Research unit and it offers more concern for what may be the greatest manipulated economy that there is.

S&P points out that corporate downgrades are edging up as investors continue to wait for China to inject more stimulus. The report shows that China’s real GDP slowed to 7.6% in the second quarter from 8.1% in the first quarter. S&P lowered its total 2012 China GDP targets just last month down to 7.5% from 8.0% that it was previously calling for.

So what is &P really saying here? It is much slower. If the new rate is 7.5% and the first two reports were 8.1% and 7.6% the that means that Q3 and Q4 will average only 7.15% or so.

As far as credit ratings, S&P said that 73% of the 96 rated companies in China only being started in credit rating coverage since 2008. It also said that 60% of issuers in China are speculative grade (i.e. junk-bonds).

We would note that the key China ETF has recently tried to stage a breakout, perhaps on the hope that the stimulus data that we have already seen from the Chinese government will be amplified. The iShares FTSE China 25 Index Fund (NYSEMKT: FXI) is up 0.8% today but the 52-week trading range is $31.62 to $40.74. If you take a look at the stockchart.com image below, this ETF has been trading above the 50-day average for some time but the ETF has now broken above the 200-day moving average after a solid tug-of-war between $35.00 and $35.50. If this chart does not slip backwards then there may be nothing but clear air up to $37.25 or $37.50.

S&P stated, “China has been unable to sustain its growth momentum in the year of the dragon, leading our economists to lower their growth expectations for the country. Corporate downgrades have been increasing and the country’s negative bias has edged up. However, investors continue to wait for the government to introduce growth-stimulating measures and lead global recovery.”

JON C. OGG