Is Chinese Stock Mania Cooling?

♠ Posted by Emmanuel in , at 7/05/2007 11:58:00 PM
Today I feature two differing points of view on whether the great Chinese stock market boom is slowing down somewhat or is still going strong. Let's begin with the slowdown theory. On Thursday, China's stock market fell by 5%:
Chinese stocks nosedived more than five percent on Thursday as more investors stayed away from the market, which has been highly volatile in the past month.

The benchmark Shanghai Composite Index fell 5.25 percent to close at 3,615.87 points, extending Thursday's two percent loss.

Turnover in Shanghai A-shares was low at 75.76 billion yuan, slightly higher than the 72.26 billion yuan on the previous session, but less than one-third of the daily record of 267.5 billion yuan reached on May 30.

That indicates many investors remain cautious and are staying away from the market, analysts said, adding that it may take a long time for investors to regain confidence.

The decreasing faith among investors could also be seen in the steady drop of the number of new share trading accounts opened each day.

On Wednesday, only 70,132 new accounts were opened, the lowest since February 26, after 80,000 were added on Tuesday. That marked a big drop from the daily average of more than 300,000 in May.

Only some 80 out of more than 1,200 stocks in the Shanghai and Shenzhen A-share markets posted gains, while more than 250 stocks fell their daily limit of 10 percent.

The fall was attributed to a planned huge sale of special bonds and an increase in stock supplies.

As alluded to by the China Daily, there is a forthcoming government issue of special yuan-denominated bonds meant as a springboard for China to invest its considerable foreign exchange stockpiles abroad. The fear in local stock markets is that this issuance might mop up cash that would otherwise have been destined for equity investments in China:

China's Ministry of Finance will soon kick off the sale of 500 billion yuan ($65.82 billion) in bonds, as the first batch of its planned 1.55 trillion yuan special bonds, the China Business News reported on Thursday.

The finance ministry has submitted an application to the State Council, or cabinet, to launch the first-tranche offer, the Shanghai-based newspaper quoted unnamed sources as saying.

The remaining more than 1 trillion yuan bonds should be issued in two batches, with each averaging around 500 billion yuan, according to the need of China's new overseas investment agency, the report said.

The proceeds raised from the bond issue will be used to fund the establishment of the investment agency, which will help invest part of China's ballooning foreign exchange reserves in overseas markets.

Furthermore, China Daily notes that nearly half of publicly listed companies' shares have fallen by 30% in the past month:

Almost half of the yuan-denominated A-shares in the Shanghai and Shenzhen stock exchanges fell more than 30 percent in the past month, a news report said Thursday.

In a major correction that started on May 30 after China tripled the stamp tax on stock transactions, the key indexes for the two bourses dropped 12 percent and seven percent, respectively.

Most of the stocks fared worse than the market, the Shanghai Security News reported.

Forty-five percent of the total, or 653 stocks dropped more than 30 percent; 901 stocks, or 62 percent, were down more than 20 percent; and 53 declined more than 50 percent.

That's the (relatively) pessimistic view on Chinese stocks--perhaps the market has seen better days, or the government press is playing up this angle to cool off stock markets in the country. However, the Financial Times probably sees the retreat of Chinese stocks as a temporary phenomenon. According to the FT, China is set to top the global league tables in IPOs this year.

Capital raised by new listings in China is set to exceed $52bn this year, twice the figure forecast in January, putting the mainland on track to become the world’s leading centre for share offerings this year.

The potential sums raised in primary and secondary listings this year underscore the huge liquidity in China’s domestic stock market and will heighten fears in Hong Kong, London and New York that they will no longer continue to benefit from hosting mainland IPOs.

The forecast was issued on Wednesday by PwC, the professional services firm.

Richard Sun, PwC partner, said the firm expected capital raised by A-share listings in Shanghai and Shenzhen to total Rmb400bn ($52.6bn) in 2007, up from a forecast Rmb200bn in January. A-shares are traded in renminbi and are open only to locals and selected foreign institutions.

The flood of offerings is being driven by mainland companies’ rush to benefit from valuations on the soaring stock market. The main Shanghai index has trebled in the past 18 months...

IPO issuance last year in Hong Kong ($41bn), London ($39bn) and New York ($29bn) easily outstripped that of China’s mainland bourses, which were closed to new listings until June while market reforms were carried out.

US exchanges have been particularly concerned that they are missing out on the flood of Chinese IPOs and have blamed US regulatory burdens for discouraging overseas companies...

PwC said that A-share listings in China in the first six months of the year hit Rmb169bn, with an even stronger IPO pipeline forecast for the rest of the year.

The soaring mainland IPO market is especially worrying for Hong Kong, the natural home for mainland companies to list over the past decade. Hong Kong IPOs this year have so far raised HK$102.6bn ($13.2bn).