China's volatile markets reflect growing uncertainty in booming economy

Elaine Kurtenbach, THE ASSOCIATED PRESS
SHANGHAI, China - Chinese investors took a beating Monday as the Shanghai composite index sank 7.2 per cent to its lowest close in nearly six months.

The benchmark's decline shadows the malaise on Wall Street, but also reflects jitters among Chinese investors over how their country will weather a global slowdown as it faces daunting economic strains of its own.

"I'm not really worried, because it couldn't get any worse," said Mel Ma, a 25-year-old Shanghai public relations executive. "I made money over the past two years, but then lost all my profits in six trading days."

While Chinese shares are still largely off-limits to foreign investors, recent trends show its markets are no longer immune to global realities. The past two weeks - unlike most of last year - Chinese markets have been pulled back and forth along with other regional exchanges amid concerns over a U.S. recession.

"Today's decline directly reflects worries over global stagnation," said Chen Huiqin, an analyst at Nanjing-based Huatai Securities. "The U.S. market's weakness spilled into Hong Kong, and Hong Kong's weakness affected Shanghai."

The Dow Jones Industrial Average fell 1.4 per cent last Friday, while Hong Kong's Hang Seng Index fell 4.3 per cent Monday.

In Shanghai, the decline at the start of the week matched that of Jan. 22, when the composite benchmark also fell 7.2 per cent. Its close Monday, at 4,419.3, was its lowest finish in nearly six months.

The index has already lost 16 per cent so far this year. And although it is still more than 50 per cent higher than it was a year ago, the correction that began in mid-October has rattled many of China's new investors, who had piled into the market by the millions over the past two years, hoping for higher returns than the paltry interest paid on bank savings.

Many have cut their losses and cashed out.

"The recent, continuous declines caused panic," said Peng Yunliang, a senior analyst at Shanghai Securities.

According to the Shanghai Depository and Clearing Co., as of Jan. 18, some 60 per cent of all share trading accounts for the main class of yuan-denominated "A shares" were vacant, meaning their owners had sold off their shares.

Fears that a U.S. economic slump will hurt demand for Chinese-made products have sapped confidence in the prospects for a return to the bull run of last year. Meanwhile, a prolonged bout of severe winter weather is also taking a toll.

Ice and snow have paralyzed transport across wide regions of southern and central China, slowing shipments of coal and prompting the government to order emergency measures to counter power outages.

China Aluminum Corp. plunged by the daily 10 per cent limit to 30.1 yuan on Monday.

Many large caps were dragged down by new profit worries.

Market heavyweight PetroChina fell eight per cent to 24.06 yuan. Citic Securities plunged by the daily limit of 10 per cent to 68.42 yuan, as did refiner Sinopec, which fell to 17.05 yuan.

Industrial and Commercial Bank of China, the country's biggest lender, sank 6.2 per cent to 6.62 yuan.

"Investors, especially institutional investors, are very cautious," said Chen of Huatai Securities. "They're waiting for some 'market rescuing' action, or at least some comment, from the government," she said.

China's regulators do have a record of tinkering with policy to counter market trends: In October, the authorities suspended sales of mutual funds to new subscribers, taking the steam out of what they feared was a stock price bubble.

Ma, the PR executive, says she was not optimistic about any government action.

"We don't expect the government to do anything until it's too late," she says. But she'll still dabble in stocks.

"There are always regrets in stock investing," Ma said. "But better not to waste time on that and to instead focus on good stocks and opportunities."

© The Canadian Press, 2008