China's roller-coaster ride begins

A top analyst has warned that roller-coaster shares price movements in China could become the norm, following Tuesday's 4.5% decline in share prices on Chinese exchanges.


The benchmark Shanghai Composite Index plunged 4.5% on fears of more aggressive tightening by regulators following the release of the latest CPI figure of 6.5% and the pressure of a 200 renminbi billion special treasury bond placing in the market on Tuesday.

Prices recovered somewhat today, but the advance was weak compared to Tuesday's declines, and Jerry Lou, China analyst at Morgan Stanley in Shanghai, said it could signal the beginning of the end of China's stocks bubble.

"I'm not saying China will see such huge swings every day, but it wouldn't surprise me if these kinds of moves every few weeks or so become the norm," he told Financial News.

"There are a lot of price drivers in the market at work that really lack clarity. The market, at these levels, makes it hard to justify the stock prices."

Lou wrote in his daily research note today that China's surging CPI and the floating of the special treasury bonds "seem to be serving as immediate catalysts to trigger an A-share market correction (4.5% Tuesday), while China's accelerating capital account effort should serve as a long term de-rating driver for the A-share market. We reiterate our cautious onshore market view."

Asked about the delayed execution of the government's plan to open access to Hong Kong's markets for mainland investors in China, Lou said he was confident they would get things moving soon.

"I think it's going to happen sooner rather than later. There are more technical procedures the regulators need to go through, both at the China Banking Regulatory Commission and the other regulatory bodies, but I don't think that's going to delay things significantly. Hopefully we should see that in something like a month."

Lou said his biggest worry was that regulatory concern over a potential financial shock could translate into loosened tightening of efforts to allow for a market soft-landing. "I think when the market is overly speculative (in the past three months, the average monthly A-share market's free-float turnover has been 82%), a soft landing is highly unlikely, in any case."
Source: efinancialnews.com