China

Shares Hit 4-Year Low In China

WSJ

27 November, 2012

SHANGHAI—China's main stock index closed at its lowest level in almost four years Tuesday and slipped below a key psychological level, indicating deepening investor worries over the health of the nation's public equity markets.

The fall in the market, already one of the world's worst performers this year, comes even as China's economic outlook brightens after nearly two years of slowing growth. It stands in stark contrast to a more upbeat tone in the country's currency and interest-rate markets.

China's stock market, notorious for its volatility and defiance of economic fundamentals, poses one of the big challenges for a new leadership tasked to bring the world's No. 2 economy onto a more efficient and sustainable growth track. Falling share prices leave Chinese companies increasingly dependent on state-dominated banks and a shadowy, informal banking system to raise money— a dependence that critics say Beijing needs to shed to chart a sustainable growth path.

The benchmark Shanghai Composite Index ended Tuesday down 1.3%, or 26.29 points, at 1991.17, its lowest close since Jan. 23, 2009, when it closed at 1990.66. It also marked the first time the index closed below the psychologically important 2000 level in the same period, a development that further depressed investor mood.

In another sign of the dwindling interest in stocks, transactions totaled 39.09 billion yuan ($6.28 billion) Tuesday, down sharply from this year's daily average of 66.52 billion yuan.

The index has lost 9.5% so far this year. By contrast, the Dow Jones Industrial Average in the U.S. was up about 6% this year as of midday Tuesday and London's FTSE 100 index has gained 4.1%. In Hong Kong, where many foreign investors make their bets on Chinese themes, the Hang Seng Index has surged 18.5%.

The sagging Chinese market defied gains in other parts of Asia on Tuesday, as investors from Tokyo to Sydney breathed a sigh of relief following an agreement by Greece's international creditors to end a budget impasse there.

"Confidence in the stock market appears to have reached a new low this year, with transaction volumes really thin now. Investors are looking for policy signals ahead of the annual central economic work conference in December, but so far on the policy front it seems muted," said Deng Wenyuan, an analyst at Soochow Securities 601555.SH -0.57% .

Mr. Deng was referring to a key annual meeting among China's senior leadership, typically held in December, that will set the tone for the following year's economic policies and outlook. This year's meeting is more important than most because it follows China's once-a-decade leadership change.

For Tuesday's move, analysts also cited a possible glut of shares early next year, a weak outlook for corporate earnings and an expected seasonal cash crunch toward the year's end.

But the market faces longer-term pressures. Unlike markets elsewhere that depend on institutions such as pension funds that invest long term, Shanghai's market is dominated by smaller, retail investors who tend to think more short term. Participation by foreign investors is tightly restricted. Initial public offerings can take as long as three years to meet regulatory approval and often come to market without regard to investor demand. Companies whose shares already are listed also need hard-to-get approvals to sell more stock.

"Systemic flaws, such as a less market-oriented IPO mechanism, make it hard for the stock market to fully reflect a rebound in the economy," said Zhang Gang, an analyst at Central China Securities. Uncertainties over the policy direction of China's newly installed leadership are also weighing on the market, he added.

The China Securities and Regulatory Commission since last year has taken steps to address investor concerns, including lowering trading fees and tightening delisting rules. Last week it issued a new rule tightening restrictions on companies under suspicion of insider trading.

Other markets in China have signaled optimism over signs of faster growth that the stock market appears to be casting aside. The yuan has risen 1.2% against the dollar since the start of this year, a move largely guided by Beijing but supported by investors in China's onshore currency market.

China's market for interest-rate swaps, a derivative instrument sensitive to economic and monetary policy outlook, is also strong, with the benchmark five-year swap having climbed 0.76 percentage point to 3.64% since the start of this year.

"The fact that the economy still lacks a clear catalyst for growth is probably what puzzles the market the most," Wei Fengchun, general manager of the macro-economic and strategy department at Bosera Asset Management Co., wrote in a research note.

Following a disappointing third-quarter earnings season, analysts said they expect corporate profits to stay weak in the first quarter of next year as many industries remain plagued by overcapacity.

Worsening the sentiment were resurfacing worries about a potential surge in share supply, as holders of many companies listed on a startup board could sell their stakes starting next year, traders said. Also pressuring the market are expectations that funding conditions in China's short-term money market will get tighter toward the end of the year, when demand for cash typically surges for gift purchases and bonus payment, analysts said.