Thursday, 24 January 2008

Chinese Stockmarket Falls - crash coming?

Do the recent large falls in Chinese stocks represent the beginning or the end?

I believe there is a lot further to fall yet once certain positions start to unravel. For now it is holding. I agree that the bubble can burst for a number of reasons and that domestic pressures are far more serious than foreign ones - however, the trigger may still come from worries over the US. The rest of the house of cards will follow.

The FT consider this issue in a comment in today's LEX.

Chinese stocks [FT]

Red polyester lanterns dangle across Shanghai’s store fronts while office lobbies are a riot of scarlet and gold. But one ingredient is missing as China prepares to usher in the lunar new year – the traditional stock market rally. Instead, the Shanghai Composite Index has tracked global volatility, shedding 12 per cent on Monday and Tuesday and recovering 3 per cent on Wednesday.

The falls, however, may be an excuse to exit an overvalued market rather than evidence that China’s domestic currency “A” share market – in which foreigners have only a tiny stake – is turning global. Sure, slower international demand will crimp Chinese earnings, and US subprime exposure is (slightly) denting Chinese banks’ balance sheets. But this is small beer compared with issues at home. On the economic front, tighter monetary policy, alongside the slowdown in external demand, is expected to prune growth to 10 per cent or so. Some sectors will take a bigger hit. Banks go into 2008 with a constrained ability to lend – reserve ratios are higher and lending growth has been curtailed by diktat – and thinner interest rate margins as a result of asymmetric rate rises. Companies with earnings bloated by fat stock market gains will suffer if the market continues to wilt – in aggregate, perhaps one-fifth of net income was accounted for by investment gains last year.

Meanwhile, early indications point to massive equity issuance. A few weeks in, $9bn has been raised on the “A” share market; another $30bn is due in the coming weeks. Issuance this year is expected to trump 2007’s $78bn. On top of that, some $200bn of newly tradeable shares – following reforms designed to scale back state-held stock – could be unleashed this year, representing 17 per cent of free-floated “A” shares, according to HSBC. There are plenty of reasons for China’s stock market bubble to implode, but most are internal.


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