A study in pain: The Chinese stock market
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China’s stock markets were closed for a holiday on Friday, and many Chinese investors may be thankful: That was one less trading session in which to lose money.
As the nation’s stock bubble continues to deflate there are more calls for the government to take action. But it isn’t clear what authorities could do, even if they were willing.
China’s once red-hot markets have been among the world’s worst performers this year. The Shanghai composite index is down 34.5% year to date and down 43% from its all-time high reached in October.
U.S. investors in the iShares FTSE/Xinhua China-25 exchange traded fund haven’t fared quite as bad. The fund, which is supposed to track the performance of the 25 largest Chinese stocks, is down 33% from its October peak.
Still, the losses in Chinese stocks make the slump in the U.S. market look amateurish by comparison. The U.S. Standard & Poor’s 500 index is down 12.5% from its October record high.
China’s experience is a classic unraveling of a speculative frenzy. The Shanghai index rocketed from 1,000 in mid-2005 to cross 6,000 in October, drawing in millions of investors and speculators along the way.
But prices fell sharply in November amid a global stock sell-off fueled by worries over the U.S. credit crunch. Despite a rally in early January the market was never able to regain its previous momentum.
And since mid-January selling has beget more selling: The Shanghai market has fallen in 11 of the last 12 weeks. Now, investors want the central government to do something to stop the pain.
On the front page of Monday’s Shanghai Daily, Premier Wen Jiabao sought to reassure investors, saying the government would take efforts to promote the ‘stable and sound development’ of the stock market. But he didn’t give any specifics, says Times Staff Writer Don Lee in Shanghai.
In the past, such pronouncements by top officials often were enough to trigger market rallies. Not this time. The Shanghai index plunged a total of 7% Monday and Tuesday, before recovering about half that loss on Wednesday and Thursday.
One gesture the government could take would be to lower the so-called stamp tax, a small transaction fee that investors pay every time they buy or sell shares. Officials raised the tax last year when the market was soaring. But cutting the tax might be viewed as more symbolic than substantive.
Beyond that, Beijing doesn’t appear to have many options. Many analysts believe the government can’t open the money spigot because the nation is trying to beat back rising inflation, particularly in food products.
What’s more, the stock market’s fundamentals aren’t too encouraging, Lee reports. Shares still are pricey compared with many other markets around the globe. Many Shanghai stocks sell for 30 to 35 times annual earnings per share.
And this at a time when profits are sliding for Chinese companies, as raw-materials costs soar and the global economic slowdown takes its toll. China’s export growth has decelerated markedly over the last year, says Carl Weinberg, economist at High Frequency Economics in Valhalla, N.Y. He thinks the slowdown in the first quarter was enough to cut gross domestic product growth to an annualized rate of 9% from 11.2% in the fourth quarter.
Single-digit growth for China? Weinberg believes that could be a real shocker for financial markets when the government reports first-quarter data on April 17.