Continuous Market Panic May Trouble China’s Real Economy
Continuous Market Panic May Trouble China's Real Economy
April 18,2008
PetroChina’s shares have sunk below their IPO price, putting a dent in market confidence. A large sell-off has pulled the Shanghai Composite Index down through the 3100 points barrier to 3094.67 points, a drop of 128.07 points, or almost 4%. China’s A-share market has slumped by nearly 50% from its peak of 6124.04 points in October 2007, with the psychological barrier of 3000 points next to be tested.
PetroChina is regarded as the anchor of the A-share market, especially of the big-cap blue chips. Its 5+% single-day decline, breaking the 16 yuan barrier, triggered today’s plunge. Heavy weight shares such as Sinopec, Chinalco and Daqin Railway also dropped by over 5%. The past week has seen the deepest market slump in 11 years.
Both PetroChina and Sinopec are due to release quarterly reports. Analysts worry that a below expectations performance may put market confidence on a slide. Previously, market analysts have set the price floor at 3000 points, but there is now no obvious reason for the index to stay above that point. Once the 3000 barrier has been broken, the index may sink like a stone. Signals are already pointing the A-share market towards a “hard landing,” and the effect of that, while it is unlikely to be catastrophic, will certainly cause a lot of grief right across the economy.
But why the rush for the exit? Economic data is mixed. National Bureau of Statistics calculations released this week show China’s first quarter GDP growth this year was 10.6% up over the same period last year, though the CPI also grew, by 8.0%. The same day the People’s Bank of China declared an increase in the deposit reserve ratio by 0.5% to 16%, a record high.
These statistics were not outside market expectations. “The current economic situation is actually better than was expected,” Premier Wen Jiabao said at an executive meeting of the State Council. But the market falls. Depression rules, and bailout cries echo, triggering much concern over the future development of China’s capital market.
The A-share market index has slumped by nearly 50%. The profound financial crisis caused by the US subprime crisis has to be a culprit. Nobody’s financial system seems to be immune from it. But there is no lack of malefactors on the domestic front. There are bubbles caused by the exuberant investment during the bull run that yet need to be cleared. The big company refinancing issues need to be sorted out, as does the prospective selling of SOE-held previously non-tradable stocks. All put pressure on the index.
In a country with two-digit GDP growth, the P/E ratio has been reduced to 27 times. Despite boom-level growth and reasonable valuations and investment value, market misgivings have turned into panic.
There are issues in China’s economy that require attention. China’s exports have been hit by the global economic slow down and particularly the fall of the dollar and the income of export-oriented enterprises has declined a bit. Curbing inflation is still the focus of Beijing’s economic policies this year, so a tight monetary policy will be maintained. Tight money makes it hard for real estate developers to get loans for land development and house construction and this week real estate stocks slumped. If house prices decrease too sharply for too long, real estate companies will go bust and who knows how many billions of yuan in loans may become bad loans and impact the real economy.
Three years ago, the A-share index fell through the 1000 point barrier, as China’s stock market was almost abandoned by investors. Then, that did not much affect China’s economic growth. But, if the index breaks 3000 points, will things be different this time?
Now investors again call on the government to save the market. Supervisory departments should ease market functions by regulating the large-scale refinancing issue of some enterprises, developing definite policies to control the trade of former non-tradable stocks, and reducing the stamp tax.
PetroChina is regarded as the anchor of the A-share market, especially of the big-cap blue chips. Its 5+% single-day decline, breaking the 16 yuan barrier, triggered today’s plunge. Heavy weight shares such as Sinopec, Chinalco and Daqin Railway also dropped by over 5%. The past week has seen the deepest market slump in 11 years.
Both PetroChina and Sinopec are due to release quarterly reports. Analysts worry that a below expectations performance may put market confidence on a slide. Previously, market analysts have set the price floor at 3000 points, but there is now no obvious reason for the index to stay above that point. Once the 3000 barrier has been broken, the index may sink like a stone. Signals are already pointing the A-share market towards a “hard landing,” and the effect of that, while it is unlikely to be catastrophic, will certainly cause a lot of grief right across the economy.
But why the rush for the exit? Economic data is mixed. National Bureau of Statistics calculations released this week show China’s first quarter GDP growth this year was 10.6% up over the same period last year, though the CPI also grew, by 8.0%. The same day the People’s Bank of China declared an increase in the deposit reserve ratio by 0.5% to 16%, a record high.
These statistics were not outside market expectations. “The current economic situation is actually better than was expected,” Premier Wen Jiabao said at an executive meeting of the State Council. But the market falls. Depression rules, and bailout cries echo, triggering much concern over the future development of China’s capital market.
The A-share market index has slumped by nearly 50%. The profound financial crisis caused by the US subprime crisis has to be a culprit. Nobody’s financial system seems to be immune from it. But there is no lack of malefactors on the domestic front. There are bubbles caused by the exuberant investment during the bull run that yet need to be cleared. The big company refinancing issues need to be sorted out, as does the prospective selling of SOE-held previously non-tradable stocks. All put pressure on the index.
In a country with two-digit GDP growth, the P/E ratio has been reduced to 27 times. Despite boom-level growth and reasonable valuations and investment value, market misgivings have turned into panic.
There are issues in China’s economy that require attention. China’s exports have been hit by the global economic slow down and particularly the fall of the dollar and the income of export-oriented enterprises has declined a bit. Curbing inflation is still the focus of Beijing’s economic policies this year, so a tight monetary policy will be maintained. Tight money makes it hard for real estate developers to get loans for land development and house construction and this week real estate stocks slumped. If house prices decrease too sharply for too long, real estate companies will go bust and who knows how many billions of yuan in loans may become bad loans and impact the real economy.
Three years ago, the A-share index fell through the 1000 point barrier, as China’s stock market was almost abandoned by investors. Then, that did not much affect China’s economic growth. But, if the index breaks 3000 points, will things be different this time?
Now investors again call on the government to save the market. Supervisory departments should ease market functions by regulating the large-scale refinancing issue of some enterprises, developing definite policies to control the trade of former non-tradable stocks, and reducing the stamp tax.
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