Stock investors should stay the course | Shanghai Daily

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August 31, 2009

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Stock investors should stay the course

CHINA'S stock market, one of the best performing in the world this year, made a U-turn this month on concerns about a slowdown in economic growth, government curbs on new lending and the effects of new share issues.

The country's exports, the sector hardest hit by the global economic meltdown, dropped 23 percent year on year last month to US$105.4 billion, compared with declines of 21.4 percent in June. Analysts said it is still hard to predict when the sector will emerge from the shadow of weak global demand.

Last month, domestic banks extended 356 billion yuan (US$52 billion) of yuan-denominated loans, a sharp fall from the 1.53 trillion yuan in June, suggesting the government may adopt a tighter monetary policy for the rest of this year.

The benchmark Shanghai Composite Index, which soared 91 percent this year to a high of 3,487 points on August 4, has since plummeted as much as 21 percent to 2,786 points on August 19.

"The stock market gained too much this year, so investors withdrew their funds from the market when the government indicated curbs on new lending," an individual investor surnamed Zhou said.

The pullback hasn't dimmed expectations that the market remains on an upward trend, with some analysts advising investors to stay the course despite recent setbacks.

"Chinese investors have overreacted to the central bank's talk of fine-tuning the monetary policy, but the recent drop in the stock market won't last long," Lu Zhongyuan, vice director of the Development Research Center, which operates under China's State Council, told a financial forum last week.

The People's Bank of China earlier this month signaled it might be ready to tighten monetary policy to address possible risks resulting from a record amount of new yuan loans issued this year. Those loans in the first seven months of this year surged 173 percent to 7.73 trillion yuan, exceeding the 5 trillion yuan target for this year.

Although the central bank has reaffirmed its commitment to the "appropriately loose" monetary policy adopted late last year to cushion the economy from the global slump, some investors stayed jittery about a jump in money market yields.

Lu said the overreaction to the central bank's talk of "dynamic fine-turning" hit market confidence, but he said he remains confident that share prices will gradually recover, backed by a solid economy.

A near record high 50 million A-share investors held shares from August 17 to 21, which indicated their confidence in future growth despite the plunge, according to China Securities Depository and Clearing Co.

Wu Xiaoqiu, director of the Finance and Stocks Research Center at Renmin University, said in a recent interview the most urgent task for China is boosting economic growth, which requires loose money supply.

"If consumer prices rise 3 percent, the government may need to tighten monetary policy to fight inflation, but the CPI (consumer price index) declined in July," Wu said.

He said he expects the market to fluctuate widely for the rest of this year but the upward trend won't be reversed.

A lack of transparency in monetary policy does undermine investor confidence and cause market gyrations, but a more serious problem is the fragile market structure, he said.

Yin Zhongli, a senior researcher with the financial research institute of the Chinese Academy of Social Sciences, attributes part of the recent market decline to a flood of new shares. The China Securities Regulatory Commission has approved more than 20 share issues since it resumed initial public offerings in June after nine-month hiatus.

"The intensive initial public offerings, which featured low risks and high returns, absorbed a large amount of capital from the stock market," said Yin.

The value of China's stock market totaled 23.57 trillion yuan by the end of last month to rank the third-largest in the world, the CSRC said.

A stable equity market is important for the successful resumption of IPOs and for ambitious reforms, such as allowing overseas firms to list in Shanghai, said Jing Ulrich, chairwoman of China equities for JPMorgan Chase.

In the event of more market corrections, the authorities may try to put a floor under stock prices by temporarily limiting the central bank's issuance of short-term notes, by speeding approval of new mutual funds and by scrapping the stamp duty on equity trading, she said.




 

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