The mainland stockmarket plunged nearly 4 per cent on Wednesday after hitting a fresh record earlier in the day, as heavy profit-taking by mutual funds was triggered by sharp falls in Hong Kong’s market, traders said.
The Shanghai Composite Index closed 3.81 per cent lower at 4,300.563 points, after rising as much as 0.7 per cent to a record intra-day high of 4,502.296 in the morning. It tumbled as much as 4.16 per cent at one stage.
Stocks fell across the board, with losing Shanghai shares overwhelming gainers by 790 to 89. Turnover in Shanghai A shares expanded to 168.1 billion yuan from Tuesday’s 148.3 billion. Half a dozen traders and analysts said the market’s tumble, the biggest fall for a month, was not caused by negative news or policy rumours, but occurred because stocks were vulnerable to profit-taking after surging 15 per cent since July 19.
Many traders had seen 4,500 points as a target for the index, and began selling near that level as Hong Kong stocks slid in response to weakness on Wall Street. Selling snowballed as mutual funds rushed to cash in gains. “Funds seem to have decided to take some of their money off the table because the market rose so fast recently,” said Tang Zhenbin, analyst at Hongyuan Securities.
Technically, the index showed classic signs that its uptrend had ended for the short term, forming a bearish engulfing pattern at its high as 14-day momentum showed a negative divergence. Some analysts said investors were concerned that authorities might take further action to cool the market if it climbed too fast. The index plunged as much as 21 per cent after it hit its May peak as the government hiked the stock trading tax.
Investors were worrying about further policies by the authorities after Friday’s sudden hike of bank reserve ratios, and they remember the pull-back in May,” said Zhang Yanbing at Kinghing Securities. But the index held initial technical support near 4,300 points, close to where it peaked in May and June, and many analysts said they did not think a long-term decline was starting.
First-half corporate profits are proving strong while stock turnover remains much lower than it was in May, suggesting trade has not become wildly speculative and authorities may not feel compelled to intervene in the market. Bank of Communications Schroders Fund Management said it had raised the targeted 12 billion yuan for a stock fund it launched on Wednesday within half a day. Earlier, ABN Amro’s fund arm in China and Great Wall Fund Management said they had each raised 12 billion yuan for their new stock funds. The fund news suggested there would be plenty of new money to buy into any market weakness.
In recent weeks authorities have quickened their approvals of new funds, apparently to ease concern among investors about the market’s ability to absorb a series of initial public offers expected later this year. Coal, steel and metal shares led the market down on Wednesday after their strong performance in the past several days, as some investors became cautious about valuations of those stocks. Datang Coal dropped 4.32 per cent to 34.31 yuan, after soaring 34 per cent over the previous seven trading days.
Among banks, industry leader Industrial & Commercial Bank of China slipped 3.66 per cent to 5.53 yuan. But Jiangxi Wannianqing Cement jumped its 10 per cent daily limit to 10.15 yuan after saying it would form a 1 billion yuan joint venture with China National Building Material. Jiangxi Wannianqing had been suspended since July 16 pending an announcement.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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December, 2007
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