Trader Talk

Morgan Stanley: It's no time to buy Chinese stocks

Investors watch computer screens at a stock exchange hall in Fuyang, China.
ChinaFotoPress via Getty Images

Another drop in China. The is down 7.4 percent, and the Shenzhen fell 7.8 percent.

Shanghai is now about 20 percent off the multi-year highs of a few weeks ago, but all of this has to be viewed through the prism of the crazy bubble China A shares have been in. The Shanghai Composite rose more than 60 percent from March to the middle of June and is still up 30 percent for the year; the Shenzhen is up 77 percent.

Morgan Stanley was out with a note this morning in which it concluded: "This is probably not a dip to buy ... the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and Chinext has now taken place."

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The firm cites four issues:

a) increased equity supply,

b) weak earnings growth with a slowing economy,

c) high valuations; and

d) very high margin debt to free float market capitalization.

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What would make Morgan more positive? An improvement in the economy, for one. Slowing down the IPO calendar, for another. The government could also step in to help the market. One idea is for the government to launch a tax-advantaged savings scheme similar to a U.S. 401(k).

THAT would certainly make a difference, but that is a long way off.