China stocks rise to record highs again

China’s key stock index rose to a record, having taken less than two weeks to rebound from a rout that erased more than $400 billion (Rs16.4 trillion) of market value.

China Merchants Bank Co. and property developer China Vanke Ltd paced gains after policymakers held off from raising borrowing costs. Premier Wen Jiabao last week said monetary policy needs “moderate tightening,” after reports showed inflation is at a two-year high and money-supply growth exceeds the central bank’s target.
Sichuan Changhong Electric Co., the nation’s second biggest television-set maker, was one of the 10 stocks included in the CSI 300 Index to surge by the 10% daily limit after Microsoft Corp. agreed to buy a stake in the company.

The CSI 300 climbed 128.19, or 3.1%, to 4227.57 at the close, with about 90% of the shares included in the measure advancing. It has tripled in the past year, the biggest gain among 90 global benchmarks tracked by Bloomberg.

“Investors keep buying shares as a rumoured clampdown involving measures such as interest-rate increases failed to materialize over the weekend,” said Chen Shide, who manages the equivalent of $212 million at GF Fund Management Co. in Guangzhou. “It can’t be ruled out that the government will still take action.”

The CSI 300, which tracks yuan-denominated A-shares listed on China’s two exchanges, plunged as much as 22% from 29 May’s record close of 4168.29 after the government tripled the tax on securities trades. It took about a month to recoup a single-day loss of 9.2% on 27 February, the biggest slide since the gauge was introduced in April 2005.

Investor interest has waned little since stamp duty was tripled to 0.3%. About 250,000 new securities accounts were opened daily last week, compared with the quarter’s average of some 300,000, official figures show.

Merchants Bank, which has the biggest weighting in the CSI 300, jumped 1.78 yuan, or 8%, to 23.98. Industrial & Commercial Bank of China Ltd, the nation’s No.1 lender, rose 0.09 yuan, or 1.8%, to 5.24. Bank of China Ltd, the second biggest, added 0.07 yuan, or 1.3%, to 5.36.

China Vanke Ltd, the country’s largest listed developer, climbed 0.87 yuan, or 4.6%, to 19.97. Gemdale Corp., a Chinese developer that partnered with ING Groep NV, jumped 3.28 yuan, or 10%, to 36.09. Shanghai Lujiazui Finance & Trade Zone Development Co., a developer in Shanghai’s financial district, gained 1.08 yuan, or 3.7%, to 30.09.
China’s bank regulator has found that eight banks including Bank of China have illegally lent money to companies that used the funds to buy stocks, Capital Week magazine reported. The regulator retracted a 5 June press release on its findings amid concern the news will trigger a market slump that causes borrowers to default on their loans, it said.

China’s securities regulator summoned managers and chief investment officers of 57 mutual funds last week, telling them to refrain from speculating on market rumours for short-term gains, China Business News reported on Monday. Sichuan Changhong Electric jumped by the daily limit after the company announced Microsoft Corp. has agreed to buy 15 million new shares for 94 million yuan ($12 million), or 6.27 yuan each. The shares rose 0.99 yuan to 10.92.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 2.9% to 4253.35. The Shenzhen Composite Index, which covers the smaller one, rose 2.8% to 1257.75.

“The government didn’t raise interest rates over the weekend and that’s bolstering sentiment,” said Yao Maogong, head trader at Shanghai Securities Co.
The People’s Bank of China has raised interest rates twice this year to rein in industrial expansion and tame inflation, with both announcements made over weekends.
It has also ordered commercial banks five times to set aside more money as reserves to curb lending.

Even so, bank savings rates trail inflation, helping steer funds in to stocks.
Household yuan deposits fell by 278.4 billion yuan in May, after sliding in April for the first time since February 2003. Commercial banks’ deposit rates are capped at the central bank’s one-year deposit rate of 3.06 %, less than the 3.4% inflation rate.

Chinese Stocks Take Big Fall

Chinese stocks plunged Monday following government efforts to cool a market boom, recording their biggest one-day fall since a February drop that triggered a global sell-off.

The benchmark Shanghai Composite Index tumbled 8.3 percent to 3,670.40, falling for the third time in four sessions since the government raised a tax on trading last week. The index had dropped 2.7 percent Friday. The Shenzhen Composite Index for China's smaller second market fell 7.9 percent to 1,039.90.

It was Shanghai's biggest decline since Feb. 27, when the main-market composite index slid 8.8 percent, triggering selloffs in Hong Kong, New York and London.

"There is the risk that this snowballs into a crash. Sentiment is so fevered that a bubble could burst," said Claire Innes, an economist in London with the consulting firm Global Insight.

But most other Asian markets shrugged off Monday's plunge. Five markets -- Australia, Indonesia, Singapore, South Korea and the Philippines -- rose to record highs. Tokyo's Nikkei 225 index edged up 0.08 percent, while Hong Kong's benchmark index rose 0.6 percent.

The impact of the Chinese decline on markets abroad was expected to be limited because Beijing keeps its markets largely isolated from global financial flows. Most Chinese shares are off-limits to foreign investors and financial controls prevent most Chinese from investing abroad.

The Chinese currency, the yuan, fell slightly against the dollar on Monday after rising throughout May.

Beijing is trying to cool a boom that by last week had pushed up Chinese stocks more than 50 percent since the start of the year. The rally has attracted millions of first-time investors who are pouring their savings into the market.

Government financial newspapers tried to reassure investors with front-page editorials Monday that said the tax hike on stock trades -- from 0.1 percent to 0.3 percent -- would be good for the market by encouraging longer-term investment in better stocks.

But blue chips were hammered as shares in about 1,000 of the 1,400 companies on the main "A"-share market fell by the maximum daily limit of 10 percent. They included Tsingtao Brewery and China Petroleum & Chemical Corp., also known as Sinopec, two of China's most prominent companies.

Beijing has given no sign how much it wants prices to fall, but economists say Chinese leaders might consider 20 to 25 percent the right level to restore order to the market.

Drops in Chinese prices last week caused brief declines in markets in Tokyo, Hong Kong and elsewhere.

Analysts have been warning of a possible Chinese correction for weeks, reducing the element of surprise for investors abroad.

Philippine shares appeared to be benefiting from the sell-off in China as some foreign investors shift funds to elsewhere in the region, said Lawrence de Leon, an analyst at Accord Capital Equities Inc. in Manila.

"A lot of money is going out of the China equities and are moving into other Asian markets, among them the Philippines," he said.

Even with the declines since last week, the Shanghai index is still up more than 37 percent since the start of the year, after rising more than 130 percent in 2006. It has dropped 15 percent since last Tuesday's all-time high of 4,334.92.

The surge has been driven by strong corporate profits and an influx of money from Chinese investors, who have opened millions of new trading accounts and are dipping into theirs savings and mortgaging homes to buy stocks.

Authorities have warned that the new money could be fueling a bubble and they say novices could be hurt by a sharp fall in prices.

Regulators are facing conflicting pressures as they try to develop China's markets into a source of financing for economic reform while also trying to discourage speculation, said Global Insight's Innes.

To create a more stable market, Beijing will have to encourage more pension funds and other institutional investors to get into the market and ease barriers to foreigners owning shares, she said.

Otherwise, she said, "you're going to keep seeing these cycles because it's fueled by all this cheap cash flooding around."

China stock crash fails to shake the world

Via Mint

The most interesting event of the past week was something that didn’t happen. On 30 May, the Chinese authorities announced a hike in stamp duty on share trading, sending Chinese stocks spiralling downwards.

As the Shanghai index plummeted 6.5% and the Shenzhen Composite fell by 7.19%, investors around the world held their collective breath, wondering whether this would trigger a collapse on Wall Street. That’s exactly what had happened in February and it took over a month for markets to recover from the damage.

Thankfully, this time it’s different. After the initial knee-jerk selling in the futures market, the party on Wall Street continued. The upshot: Markets rebounded smartly across the globe a day later.

The big difference between 27 February and 30 May is that the US markets didn’t follow Shanghai’s lead. International investors seem to have realized that the Chinese stock market doesn’t really matter and the speculative frenzy there has been driven entirely by local punters.

Nor does the stock market have much of an impact on China’s economic growth, which is driven by state-directed bank lending and foreign investment. It’s very unlikely that a market crash in China will derail the economy. That’s why the crash in the stock market led to only a 1% decline in Shanghai copper prices.

Global investors seem to have learnt these lessons. In February, the crash on Wall Street was primarily about worries whether inflation was making a comeback in the US and disappointment that rate cuts would not happen. This time, there are no expectations of a rate cut.

But perhaps the key message from the blasé attitude to the Chinese shock is that it’s an indication of the strength of the current global rally.

The Shanghai crash could easily have been an excuse for speculators to take some money off the table. The fact that it didn’t happen is a pointer that risk appetite is alive and well. As EPFR Global, a research firm that tracks fund flows to emerging markets, said recently, “Risk aversion took a holiday during the fourth week of May as investors poured money into most emerging markets fund groups. Latin America and Global Emerging Markets (GEM) Equity Funds had their best week in over a year…the spread between US Treasuries and JPMorgan’s benchmark EMBI+ index narrowed to a new record low of 153 basis points.”

Of course, the action in China is far from over. If Chinese stocks shrug off the latest salvo from the government, there’s little doubt that there will be redoubled efforts to cool the market.

So far, the authorities have tried interest rate increases and increases in the proportion of deposits that banks have to keep with the central bank, but none of these measures have worked. The reason is pretty simple: While the central bank is trying to cool the market, it is at the same time flooding it with liquidity, thanks to its policy of pegging the yuan to the dollar. As Chairman Mao would probably have said, this is the principal contradiction in China today. How they resolve these conflicting objectives will be interesting.

Back home, the Reserve Bank of India has its own contradictions, having to worry about juggling the exchange rate, the interest rate and money supply. But the good news is that the latest GDP numbers show growth is now being driven by capital expenditure and not so much by consumption. That implies a resilience to higher interest rates. Corporate balance sheets are healthy, with large cash balances and not much debt, which makes them able to go in for capital expansion without being hurt badly by higher interest rates. They can also access relatively cheap debt abroad or tap the capital markets. In any case, capex is less sensitive to interest rate increases than retail credit.

The slowdown, therefore, will be primarily in the consumer discretionary and export sectors. The markets have already priced that in, de-rating sectors such as autos and IT services, while upgrading capital goods and infrastructure companies. With good global and domestic cues, the BSE 500 closed the month with a gain of 6.3%, not a bad return for investors who are traditionally supposed to “sell in May and go away”.

Yet the surge in May has also been accompanied by a bout of downward earnings revisions. Consensus earnings growth estimates for FY08 for the stocks comprising the MSCI India index have been revised downward from 16.9% to 15.7%. That makes current valuations look really pricey, especially with a lot of new issues hitting the market. The fact that stocks have continued to rally in spite of the revisions is another indication that liquidity, especially global liquidity, is driving this rally.

So what could change the outlook for liquidity? Instead of looking at China, investors may do well to concentrate on the US.

The yield on the 10-year Treasury note moved up to 4.9% on Thursday, its highest level this year. The worry is that whenever the US long-term rate goes up, as it did in May 2004, April 2005, October 2005 and May 2006, emerging markets have tottered.

During the crash in May last year, the yield on the US 10-year note went up to a high of 5.18%. In May 2004, it went up to 4.8%, sparking a huge sell-off in emerging markets. Given this track record, investors would do well to be wary of rising US bond yields.

Citigroup - Risks & Impacts of China Stock Bubble

Citigroup - Risks & Impacts of China Stock Bubble