Thursday, 17 April 2008

Stockmarket continues to slide - 46.3% down from the October 16th high

The FT report on the pain being suffered by the small Chinese investor. With large shareholding being owned by local officials and even the army a major meltdown is only a few economic and political disasters away.

Click on the stockmarket label to see our previous posts and my historic predictions which are beginning to look rather good :-)

Investors in China brought back down to earth [FT]

Shares in Shanghai have plunged as sharply in the past six months as they surged during the first part of 2007.

The Shanghai composite index closed on Wednesday at 3,291 – down 46.3 per cent from its all-time high of 6,124 on October 16.


Rumours abound that Beijing will do something to boost the market. But prices fell by 5.6 per cent on Monday alone.

“The reason for the repeat this week of ‘Black Monday’ is mainly because people were still expecting a policy change from the government over the weekend,” says Chen Huiqin, analyst at Huatai Securities in Shanghai. “As long as there is nothing new coming out, the pessimistic atmosphere will affect the market.”

So why have share prices fallen so rapidly. Most readers of this blog will already know the answer. The short answer is that shares became insanely overpriced based on standard measures such as PE etc. It was a simple bubble and retail investors felt like they were in a casino where they could never lose. Do not underestimate the share lock up factor - share sales could prove a major drag on prices.

But Mr Evans says there are other reasons for the sharp declines of the last six months.

Beijing does not want the economy to overheat. Inflation has been persistently high – consumer prices are rising at 8.3 per cent a year.

The central bank, the People’s Bank of China, raised policy lending rates by 135 basis points last year and it has lifted the bank reserve requirement 15 times since mid-2006 to a record 15.5 per cent. The PBoC governor this week hinted rates might have to rise further to stamp out inflation at near 11-year highs. “Being in a market where the authorities are tightening is not good for investors,” Mr Evans says.

Steven Sun, HSBC China equity strategist, says there are still billions of non-tradable shares locked up from earlier flotations that will be released on to the market in the second half of this year. That may depress prices further.

Many companies that planned to float in Shanghai have thought again. Figures compiled by Thomson Financial show that the amount of cash raised in initial public offerings so far this year at $7.95bn is 28.7 per cent lower than the same period last year. Thomson says the premium on the first day of trading has fallen from an average of 110 per cent last year to just 30 per cent.

Another worrying trend emerged late last month when shares in China Pacific Insurance dropped below the price at which they were offered to the public in December. Since then, several other recently floated companies have sunk below their offer prices.

The Shanghai market now trades at a more realistic 26 times historic earnings and 20 times estimated profits for the next 12 months.

I still think we could see 3000 short term. Other economists are saying a 50% fall from its highs should be the limit. I disagree. 2500 is not out of the question by any means once investors reach the "puke point". Sheer panic to me and you. Things are bad but no where near bad enough. From someone who rode the bubble never underestimate the power of panic.

Be warned.


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