By Huang Liming, Sun Jianfang, Zhaojuan, Subo
Published: 2008-03-27

From Money & Investment, issue no. 360, March 24 2008
Translated by Liu Peng
Original article:

On March 18, an urgent investor strategy report was rushed to clients of one Chinese securities sompany. China's A-share market had entered its twelfth straight week of decline, instilling many investors with fear and panic. The report did not offer consolation.

Huaqiu, an alias for an investor that received the report through a third party, was startled at how radically different its contents were from a concurrent public announcement made by the firm which said that falling stocks would soon bottom out. According to Huaqiu, the privately distributed report was much more pessimistic.

On Monday March 10, the Shanghai Composite Index was down 3.6% or 142.62 points to 3,820.25. Stirred by fear, Huaqiu sold off his Air-China shares at a 25% loss, keeping only the horizontally-fluctuating China Shenhua shares.

Fund management companies, who were optimistic of the stock market just two months ago, have changed their tune. One manager from Fangda Fund said that some firms had already cut their market positions by 50%.

A Bankrupt Evaluation System
Many market observers fault a failed market valuation system for the recent slide.

"The foremost pressure this year is the evaluation problem," said Wang Guowei, Chief Investment Officer of Hua An Fund Management Company. "In the bull market, fewer people paid attention to this, and last year, evaluation levels reached forty to sixty times issue value. This trend is not sustainable," added Wang.

Analysts have been perpetually lowering their evaluations of listed companies. And the frequently used price to earnings ratio (P/E) standard has been abandoned by investment institutions.

As these institutional investors retreated, the A-share market value shrank even more.

Compounding this, Liu Jipeng, professor of China University of Political Science and Law, said that at present, the capital market has only one pipeline for money to flow in through, but several outflow pipelines.

"Newly listed stocks, reduced holdings, heavy stamp taxes and the new growth enterprise board [or second board] are absorbing money from the stock market."

Faint Rescue Measures
To some extent, the raising of the deposit reserve ratio by the central bank on March 18 was deemed too faint a rescue measure by the market. Before this, the market predicted the central bank would raise interest rates.

The next day the market saw an ephemeral rally, but that eventually gave way to wildly fluctuating prices.

Sources from People's Insurance Company of China Group (PICC) said that if the government did not lend a hand, the market would continue to decline, and that if the large caps fell below 3,000 points, it could jeopardize the social stability.

Some experts tried to elicit the government's attention to the urgency of saving the market through a special internal Xinhua News Agency bulletin, which is only circulated to high-level government officials. These experts thought that Chinese A-share market entered a critical phase, and that if the market continued to fall, it was likely to cause economic catastrophe.

Cao Honghui, a director of financial research at the China Academy of Social Science told the EO that government should rescue the stock market in the following five ways: First, postpone the refinancing projects and reform the refinancing system; Second, enforce the freeing of non-tradable investments; Third, reform the stamp tax system; Fourth, delay the marketing of the growth enterprise board and stock index futures; Last, encourage listed companies to repurchase their own stocks to establish a good market expectation.