The Shanghai Composite (FXI, quote) closed down more than 1.5% in Tuesday trading over concerns about changes in the housing sector weighed down the index.
A new dawn for Chinese stocks? No, probably not.
While other Asian equity markets traded roughly flat, Shanghai and Hong Kong (EWH, quote) finished the day substantially lower. Reports that major Chinese cities in Zhejiang, Jiangsu, and Guangdong provinces have increased minimum loan requirements and capped the size of available loans in an attempt to rein in housing prices caused downward pressure in Shanghai and Hong Kong equities.
As a result of strengthening housing prices in major Chinese markets over the past few months, officials may be concerned of an inflating housing bubble. Although recent reports indicate that the housing market in Mainland China is closer to fair value than its counterparts in Singapore and Canada, the government in Beijing is likely concerned that a bursting housing bubble would have far-reaching ramifications for both the economy and social stability as a whole.
Consequently, companies with significant exposure to the Chinese housing sector performed poorly on Tuesday; stocks like Anhui Chaodong Cement dropped 7% in Shanghai while blue-chip Sun Hung Kai Holdings (SUHJY, quote) fell 1% in Hong Kong.
Technically, it looks like the Shanghai Composite is ready for a breather; the index tested the 2440 level multiple times over the past few trading sessions, but was unable to hold that level, retreating to around the 2380 level as of Tuesday’s close.
A number of pundits foresee headwinds for the Shanghai Composite in the short-term; as a result of the index’s 20%+ run over the past few months, the index is currently vulnerable to traders looking to take profits. Tom DeMark sees Shanghai stocks retreating 8% before continuing to move higher.
However, any significant pullback in the Shanghai Composite could be a great opportunity for traders. With signs that the Chinese economy is roaring back to full strength and that the Shanghai Composite is trading close to historically low valuations, a move lower in the index could be a buying opportunity.