My Blog

March 31, 2008

MON 31 MAR

Stock market still lurches downward. Are we near the bottom?

There are conflicting reports about the government’s intentions towards the stock market.  On the one hand Premier Wen said yesterday during his visit to Laos that the Chinese government will make efforts to promote stability in the development of its stock market.  According to the Xinhua version of his speech:

 

The government has two major responsibilities. One is to maintain stable and fairly quick economic development without sharp fluctuations, and concentrate on solving the outstanding problems in economic life. The other is to establish, through legal means, an open, fair and transparent market environment so as to protect the interests of investors and small shareholder.

 

Premier Wen’s positive comments, however, were not enough to overcome the perceived lack of action on the part of the government.  Today the Shanghai market closed down just over 3%, finishing off an awful three months with the market down 29%, which is apparently the worst quarter on record.   A report on Bloomberg today quotes a pretty common reason given for the continued decline:

 

“Expectations were quite high that the government would announce market-boosting measures over the weekend,” said Fan Dizhao, an analyst of financial companies for the Shanghai office of Guotai Asset Management Co. which manages about $8.5 billion.  “The market sentiment has been hurt in the absence of regulatory incentives.'”

 

Needless to say, the perception here is that everything hinges on government actions.  If they move to shore up the market, it will rise, and if they don’t, it means they want it to decline and it will decline.  It is hard to argue that China’s stock market is still at bubble-level prices – they peaked in November at nearly twice the current level – especially given that corporate earnings have kept growing for the most part.  Last week in its monthly release the National Bureau of Statistics had this to say about industrial profits, in what has been an admittedly difficult period:

 

From January to February, the industrial enterprises above designated size (all state-owned enterprises and non-state-owned enterprises with an annual sales over 5 million yuan, same as follow) reached 348.2 billion yuan, rose by 16.5 percent over the same period of the previous year.

 

More importantly than the growth in reported earnings, say some insiders, is the growth in tax payments which, according to the same release, were up 24.8%.  At these prices it is easy to make the argument that A-shares are fairly valued, and B-shares, at little more than half the level of A-shares, are positively cheap.  Still, the main driver of investment decision continues to be the government’s intentions, and looking for value continues to be a mug’s game. 

 

This is the not-unexpected consequence of years of meddling in the market to drive prices up or down according to whatever the latest current political concern may be.  I suppose that we may see a just little more weakness before the government decides that one way to bring good cheer back to pre-Olympic Beijing would be to have a couple of great months in the stock market.  Certainly the market has recently been flooded with rumors – usually a good indication of what the government is thinking – about the need to take action. 

 

For those who are interested, I am still experiencing huge problems with my internet reception, although things seem better today.  For example, I posted this entry myself, although it took several tries to get onto my site (and I won’t be sure about the format until it is up).  Many readers on- and offline sent me proxy addresses, but although some of those work sporadically, most of them still don't make it easy to post.   I don't even try to respond to comments since that has proved nearly impossible in recent days and it is only very occasionally that I can even read the comments.  I hope this changes soon.