INSIDE VIEW: China Stocks Falter As '3 Myths' Collapse
HONG KONG (Nikkei)--China is losing its image as "the world's most bullish stock market" now that the seemingly unstoppable rising streaks of Hong Kong and Shanghai stocks have come to a halt. Trading on the two key Chinese bourses has become directionless as three "myths" that had supported investor enthusiasm prove groundless.
In November, the Hang Seng Index of the Hong Kong exchange fell about 10% and the Composite Index of the Shanghai market tumbled nearly 20% after expanding nonstop over the previous 10 months. Amid the continuation of upside resistance, the collapse of the three myths has dampened investor sentiment.
The first belief to be proven incorrect is that initial public offerings always offer opportunities to make gains.
Reflecting the harder times, newspaper headlines in Hong Kong are now often sensational, such as, "Sinotruck Gets Flat Tire" and "Sinotrans Shipping Sinks." Sinotruck is China's largest maker of heavy trucks formally called China National Heavy Duty Truck Corp., and Sinotrans Shipping Ltd. is a major shipping company.
Both Sinotruck and Sinotrans carried out IPOs on the Hong Kong market in late November and fetched initial quotations over 10% lower than their offering prices.
IPOs were always followed by stock price rises in the Hong Kong market until recently this year. For example, China Citic Bank debuted on the market in April and quadrupled the allocation of shares due to a flood of buy orders from individual investors.
However, Li Ka-shing, a Hong Kong billionaire known as the "god of stock markets," said it has become hard to earn profits on IPOs. Xiashun Aluminum Foil Co., China's largest aluminum foil maker, has reportedly decided to postpone its IPO in Hong Kong, indicating that dampened investor sentiment has begun to affect corporate fundraising plans.
Tighter policy no longer buy signal
The second collapsed belief is that investors should buy shares when the Chinese government tightens its grip on credit.
While the government has kept raising interest rates and reserve deposit requirements in a bid to cool overheated economy, the Shanghai stock market has shown reactions contrary to the intended outcome of monetary tightening.
In the first eight months of this year, the government announced credit-tightening measures on 14 occasions, with the Shanghai market climbing on the trading day after each one. As the announcements were seen as meaning unfavorable incentives were exhausted for the time being, they prompted investors to flock to stock purchases.
But the trend came to a halt in September, with the market dropping on Sept. 7 after the previous day's announcement of an increase in deposit requirements. Bullish sentiment among investors, who even took credit-tightening moves by the government as an opportunity to buy, is starting to cool down.
The government carried out a hike in deposit requirements on Nov. 10 and Shanghai stocks dropped the following business day. As in Hong Kong, investors are beginning to lose confidence in Shanghai.
The third belief that was shattered is that the Chinese government prefers higher stock prices.
The U.S. subprime loan crisis was no more than a catalyst for the sudden cooling of investor confidence. Increased skepticism about Beijing's policy is considered to be the primary reason.
While the government maintains that it is committed to curbing the overheated economy, it took measures and statements to prop up Shanghai and Hong Kong stocks when they declined. When the Hong Kong market plunged in the wake of the subprime turmoil, for example, the government announced a scheme to allow individuals to directly invest in stocks on the market. When Shanghai stocks weakened as a result of a hike in the stamp tax, the government issued a comment via the state media, saying, "Momentum in the stock market remains unchanged."
Beijing has changed its position recently, though. For example, Premier Wen Jiabao showed a negative stance toward the direct investment scheme for Hong Kong shares, saying, "Preparations are needed" if it is to be adopted.
At a joint economic meeting held until Wednesday, furthermore, the Chinese Communist Party and cabinet agreed to continue the tight policy into next year.
Chinese stocks have been rising sharply on the back of cooperation among the government, companies and investors. But the structure is starting to crumble.
If Chinese investors, the most bullish in the world, are thrown deeper into confusion, the current correction may well drag on.
-- Translated from an article written by Nikkei staff writer Wataru Yoshida
(The Nikkei Financial Daily Thursday edition)