Monday, 12 November 2007

Chinese "A" shares to fall further?

China "A" shares fell again on news of fresh tightening. I have a feeling that this is only the beginning.

There is nothing like fueling a fire but the rumour posted on China Financial Markets is too good not to repeat here. China Financial Markets is an excellent blog with accurate and informed opinion.

Chinese shares down 2.4% on fresh tightening measure [Peoples Daily]

Chinese share prices were sharply lower on Monday as the benchmark Shanghai Composite Index dropped 2.4 percent after Saturday's half percentage point increase in reserve requirement ratio for banks.

The key index, which covers both A and B shares, lost 127.81 points to close at 5,187.73 points.

Here is the Pettis piece. I am providing the "rumour" in full to ensure no misunderstandings. I, for one, buy the analysis spelled out here. The possible problem though is that if funds begin to sell off in expectation of this rumour then the index might not be introduced for fear of causing even greater sell off (even though one could then argue that it is already in the price). Things might get messy, quickly.

Index futures? [China Financial Markets]

One of the advantages of having so many of my students become traders in Hong Kong and the mainland is that I get to hear a lot of the rumors. Two of my former students recently told me about a rumor that seems to be very current in the market, and I called a third who also told me that he had heard it and he thought it was reasonably credible. The rumor is that last week the Social Security Fund was asked to sell off up to 30% of its A-share positions over the next 30 days.

The last time these kinds of rumors surfaced, I am told, was last May, just before the May 30 increase in the stamp tax that trashed the markets. The interpretation that these guys are putting on it is that we may finally see, early next month, the introduction of index futures. Since these instruments are not available to retail investors, who would probably use the futures as a way of taking leveraged long positions, but are likely to be used by institutions, who are expected to use this largely for shorting purposes, most people expect that the introduction of index futures will drive the market down.

Among other things a number of investors told me that they plan to buy H-shares and B-shares, which are at a deep discount to the A-share market, and hedge market risk by shorting the index. There will be lots of tracking error, but given the size of the discount most people are not terribly worried about it.

I have no idea if this true or not and of course make no representation that it is, but this does seem to be a common rumor, and even if it is not true it may affect market behavior in the near future.


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