By Huang Liming, Zhang Yong
Published: 2008-06-20

From News, page 3, issue no. 372 June 16 2008
Translated by Zuo Maohong
Original article:

After the Chinese A-share market took a series of tumbles just over a week ago, expectations grew that the government would intervene in the market once again.

Securities watchdogs had reportedly held an emergency meeting to discuss counter-measures on the afternoon of June 12, according to one in-circle source. Officials were said to deliberating on scholars' suggestions that a stabilization fund be established

The feasibility of this fund would be studied by the Ministry of Finance, and an assessment report on the state of the Chinese stock market would be demanded of the China Securities Regulatory Commission (CSRC), the source added.

In Hong Kong, however, rumor spread among investment banks that the point now was not to save the market, but to prevent hot money from flowing either in or out greatly. "If supervisors take action to intervene, this hot money will retreat suddenly from the A-share market," said the chief of the Hong Kong office of a mainland securities company.

Tumbling Below 3,000 points
With the reserve requirement raised by 1%, oil prices soaring, Vietnam hitting economic turbulence, large IPOs approved, and the Producer Price Index (PPI) and Consumer Price Index (CPI) still high, the Chinese A-share market dove into a black Tuesday on June 10, when the Shanghai Composite Index slumped by 1026.66 points or 7.73% to close at 3072.

The H-share market didn't escape the disaster either. On the same day, the Hang Seng index tumbled by 4.21% to 23375.52, its lowest level in May.

The Shanghai composite index continued to fall in the following three trading days. It slipped below 3,000 points to close at 2957.53 on June 12, and lost another 3% to 2868.80 on June 13.

Though shareholding accounts of retail investors remained steady last week, those who participated in weekly trading had been falling since early May.

As panic and pessimism shadowed the market, the Asian and Pacific strategy research team of Goldman Sachs organized 65 meetings with their clients in Asia, Britain and the US, discussing investment strategy, market forecasts, and the risks of macro economic concerns etc.

At these meetings, "caution, moderate position size, and uncertainty over the future" were the major responses. Investors also began paying more attention to policy risks in the Chinese market.

"Experts have proposed that the government set up a stabilization fund. They think it's suitable time to do so," said a source close to the CSRC.

Early in July, 2005, when the stock market was depressed by newly-launched market reforms, supervisors tried extending loans to certain traders and letting them buy stocks, which was widely considered as kind of stabilization fund. Now the market seemed to be in the same situation again.

Risk Lies in Hot Money
However, a source from one of Hong Kong's investment banks saw things from another angle. Many investment banks have been saying they would withdraw as soon as possible if the government intervenes, this source said. Both inflation and stock market pressure at present depended on one thing—hot money. As a result, he argued, the point was not to save the market, but to prevent the hot money from flowing either in or out en-masse.

While the central bank and the State Administration of Foreign Exchange (SAFE) have been investigating hot money recently, securities watchdogs have also reportedly asked some traders to estimate the amount of hot money in the stock market.

According to Zhang Ming from the Chinese Academy of Social Sciences, hot money inflows in China had been increasing since 2003, both in quantity and in speed. By his estimate, between 2003 and the first quarter of 2008, a total of 561.8 billion dollars flowed into the Chinese market. Among that, a record high of 85.1 billion came in during the first quarter of this year.

As for the relationship between hot money and the Chinese stock market, a report by China Minzu Securities discovered an interesting phenomenon. According to a report released in early May, about 151.9 billion dollars entered China during 2003 and 2004, when the circulated A-share market value was 152.98 billion dollars. In theory, this means external hot money could buy-over 90% of the market value at that time. By the end of 2005, this money amounted to 198.5 billion dollars, which in theory could buy the total circulated A-share market value—139.288 billion dollars.

With the US economy coming to a revival and the dollar being revived, a great deal of domestic hot money would most probably charge elsewhere, said Bian Xubao, an analyst at Qilu Securities.

Though inflows of hot money didn't necessarily ramp up domestic capital prices—especially the securities market, massive outflows of hot money could strike a deathblow to a country's financial system. The financial crises Southeast Asia had once experienced and Vietnam was presently undergoing were just two examples, he said.

Institutional Responses
With a future full of uncertainties, institutions were generally acting in prudence.

According to a recent survey by a fund manager, most fund managers would choose to keep the original market position size, while only 4% said they would increase it. The main reason for this was pessimistic expectations of future profits--80% of those surveyed believed profit growth in 2008 would dip below 30%.

A fund manager in Beijing said most private funds in the market had reduced positions, with some only having 10% left. There had been less entrusted capital too, and the guaranteed returns had dropped to 8%, he added.

Chen Songxing, deputy president of Xinhua Finance, said that listed companies were likely to have dissatisfactory returns in 2008, which might become evident by the mid-year statistics.

According to a senior staffer of an insurance asset management company, their previous assumptions that the market would always submit to policies proved wrong--it turned out that the market was still falling.

Despite that government was trying to save the market, investors remained cold, said this source, adding that the pressure of higher prices in resource-related sectors such as water, power, mining, and gas were still mounting, and that the CPI might be driven up even further once this pressure extended to other sectors.

However, there were some opening up their positions. "We took a position on June 10 and bought quite a few low-valued shares," said a source from an insurance asset management company.

"I feel the fall should end. How far could it still go?" he said. Yet there was something puzzling him—we fell along with the US stock market, but didn't rise with it, he said.

Previously I though this was mainly because of a high value, but though it's cheaper now--the price/earning per share (PE) now is 20—half of the traders have short positions. The feelings of the market has become incomprehensible," he added.

Additional reporting by Zhao Juan, Ouyang Xiaohong