http://articles.moneycentral.msn.com/Investing/Extra/ChinaStocksPostBiggestDropInDecade.aspx
What's behind China's stock swoon
The plunge of China's volatile stock market sends ripples through markets from Hong Kong to New York. But few expect the Chinese market to spin completely out of control.
Chinese stocks have had all the stability of the quake-prone San Andreas fault in 2007. Market swings up and down in the 3% range have been the norm at the extremely overheated Chinese domestic stock exchanges in Shanghai and Shenzhen.
That kind of volatility, not to mention sky-high valuations and 130%-plus gains last year, had stock analysts and Chinese government officials warning feverishly that all signs pointed to a nasty correction down the road.
The big one, or at least one heck of a temblor, came with surprising intensity today when Chinese stocks fell more than 9%, the most dramatic one-day decline in a decade. Though this vaporized more than $100 billion in market value from stocks traded on most exchanges, share prices on both bourses are still in positive territory for the year, and the Shanghai and Shenzhen 300 Index actually touched a record high of 2,707.68 on Monday
A contributing factor to today's market upheaval was the action late yesterday by the People's Bank of China to raise -- for the fifth time in eight months -- the required cash reserves that lenders must park with the nation's central bank. These moves are aimed at draining liquidity from the banking system and taming the growth in lending, which grew 16% year over year in January.
As a result, among the hardest-hit stocks today in Shanghai were bank stocks such as Bank of China, China Merchants Bank and China Minsheng Bank. That's not entirely surprising given that a number of mainland banks earlier this year were trading at richer price-to-book value multiples than Citigroup (C, news, msgs) and HSBC Holdings (HSBC, news, msgs), Jing Ulrich, the head of China equity markets at JPMorgan Chase (JPM, news, msgs) in Hong Kong, pointed out last month.
Bloated valuations
Ulrich and plenty of others had warned that bloated valuations across the board suggested a correction of 15% to 20% was definitely in the cards. In that sense, an orderly retreat from recent market highs wouldn't be a bad thing at all. "It is about the time market takes a breather," says Nicholas Yeo, an investment manager with Aberdeen Asset Management in Singapore.
He adds that price-earnings ratios in both Shanghai and Shenzhen have been hovering between 35 and 40, more than double the levels in other Asian markets, excluding Japan and South Korea. Though the long-term prospects for China stocks are golden given the mainland's high-speed economy, "we could see more consolidation," Yeo said.
Today's market blowout, though painful for some, will be welcomed by financial authorities in Beijing who have been sounding the alarm about runaway valuations at both exchanges. In fact, worries that the government will take further action to cool off domestic stock markets at next month's National People's Congress probably influenced some investors to sell, says Yeo.
In late January, comments by National People's Congress standing-committee Vice Chairman Cheng Siwei that both the Shanghai and Shenzhen stock exchanges were in the midst of a "bubble" contributed to a sharp 6.5% decline in the Shanghai and Shenzhen 300 Index, which tracks local currency-denominated mainland stocks.
Caution from mainland investors
It has taken a while, but a shift to a more cautious stance among mainland investors, by far the biggest source of demand for so-called A-shares traded on the domestic exchanges, may be at hand, according to Michael Chang, an analyst with ABN Amro in Hong Kong. "People are taking money out of the market after the (just completed) Chinese New Year's holidays," he says. "They realize they have had a good run."
Though the months ahead are likely to be choppy as the markets find a more sustainable trading level, few expect the Chinese markets to spin completely out of control. Plenty of analysts, including JPMorgan's Ulrich and Lorraine Tan, the vice president of S&P Equity Research for Asia Pacific in Singapore, think the A-share market could easily deliver double-digit gains this year. Tan is forecasting a 25% gain in 2007.
Nor can anyone reasonably make the case that the China's economic growth story needs a major revision. On Jan. 25, China blew away consensus forecasts and reported that its economy grew 10.7% in 2006 versus 10.4% in 2005. Its total economic output in dollar terms is now about $2.69 trillion.
China is expected to grow again in the near-10% range in 2007 and will certainly overtake Germany as the world's No. 3 economy by the end of next year. China's latest GDP data "makes 2006 the fastest year of economic growth in a decade," Minggao Shen, a Beijing Citigroup economist, wrote in a note to clients Jan. 25 after the numbers came out.
What's behind China's stock swoon
The plunge of China's volatile stock market sends ripples through markets from Hong Kong to New York. But few expect the Chinese market to spin completely out of control.
Chinese stocks have had all the stability of the quake-prone San Andreas fault in 2007. Market swings up and down in the 3% range have been the norm at the extremely overheated Chinese domestic stock exchanges in Shanghai and Shenzhen.
That kind of volatility, not to mention sky-high valuations and 130%-plus gains last year, had stock analysts and Chinese government officials warning feverishly that all signs pointed to a nasty correction down the road.
The big one, or at least one heck of a temblor, came with surprising intensity today when Chinese stocks fell more than 9%, the most dramatic one-day decline in a decade. Though this vaporized more than $100 billion in market value from stocks traded on most exchanges, share prices on both bourses are still in positive territory for the year, and the Shanghai and Shenzhen 300 Index actually touched a record high of 2,707.68 on Monday
A contributing factor to today's market upheaval was the action late yesterday by the People's Bank of China to raise -- for the fifth time in eight months -- the required cash reserves that lenders must park with the nation's central bank. These moves are aimed at draining liquidity from the banking system and taming the growth in lending, which grew 16% year over year in January.
As a result, among the hardest-hit stocks today in Shanghai were bank stocks such as Bank of China, China Merchants Bank and China Minsheng Bank. That's not entirely surprising given that a number of mainland banks earlier this year were trading at richer price-to-book value multiples than Citigroup (C, news, msgs) and HSBC Holdings (HSBC, news, msgs), Jing Ulrich, the head of China equity markets at JPMorgan Chase (JPM, news, msgs) in Hong Kong, pointed out last month.
Bloated valuations
Ulrich and plenty of others had warned that bloated valuations across the board suggested a correction of 15% to 20% was definitely in the cards. In that sense, an orderly retreat from recent market highs wouldn't be a bad thing at all. "It is about the time market takes a breather," says Nicholas Yeo, an investment manager with Aberdeen Asset Management in Singapore.
He adds that price-earnings ratios in both Shanghai and Shenzhen have been hovering between 35 and 40, more than double the levels in other Asian markets, excluding Japan and South Korea. Though the long-term prospects for China stocks are golden given the mainland's high-speed economy, "we could see more consolidation," Yeo said.
Today's market blowout, though painful for some, will be welcomed by financial authorities in Beijing who have been sounding the alarm about runaway valuations at both exchanges. In fact, worries that the government will take further action to cool off domestic stock markets at next month's National People's Congress probably influenced some investors to sell, says Yeo.
In late January, comments by National People's Congress standing-committee Vice Chairman Cheng Siwei that both the Shanghai and Shenzhen stock exchanges were in the midst of a "bubble" contributed to a sharp 6.5% decline in the Shanghai and Shenzhen 300 Index, which tracks local currency-denominated mainland stocks.
Caution from mainland investors
It has taken a while, but a shift to a more cautious stance among mainland investors, by far the biggest source of demand for so-called A-shares traded on the domestic exchanges, may be at hand, according to Michael Chang, an analyst with ABN Amro in Hong Kong. "People are taking money out of the market after the (just completed) Chinese New Year's holidays," he says. "They realize they have had a good run."
Though the months ahead are likely to be choppy as the markets find a more sustainable trading level, few expect the Chinese markets to spin completely out of control. Plenty of analysts, including JPMorgan's Ulrich and Lorraine Tan, the vice president of S&P Equity Research for Asia Pacific in Singapore, think the A-share market could easily deliver double-digit gains this year. Tan is forecasting a 25% gain in 2007.
Nor can anyone reasonably make the case that the China's economic growth story needs a major revision. On Jan. 25, China blew away consensus forecasts and reported that its economy grew 10.7% in 2006 versus 10.4% in 2005. Its total economic output in dollar terms is now about $2.69 trillion.
China is expected to grow again in the near-10% range in 2007 and will certainly overtake Germany as the world's No. 3 economy by the end of next year. China's latest GDP data "makes 2006 the fastest year of economic growth in a decade," Minggao Shen, a Beijing Citigroup economist, wrote in a note to clients Jan. 25 after the numbers came out.