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Measures and moods as market dives

By Hu Yuanyuan (China Daily)
Updated: 2008-06-11 09:11

The government must not intervene in the stock market even as it plumbs new depths, said experts, as the Shanghai Composite Index yesterday came close to plunging to the 3,000-point mark.

Since April, the government has been trying to stabilize the market and shore up investor confidence by standardizing the conversion of non-tradable shares into tradable ones, slashing stamp tax on stock trading from 0.3 percent to 0.1 percent and asking fund management companies not to sell their holdings.

According to Dong Chen, an analyst with CITIC China Securities, any government move to "save" the market might not be a good idea.

"The slump is being caused by the market itself rather than outside forces, so allowing market forces to play out might be a better idea. Otherwise, a temporary rebound triggered by a government policy might spark a new round of selling," said Dong.

The rebound triggered by the cut in the stock trading tax in April has well and truly ended and the market may be heading down to form a double bottom, he added.

"I can hardly think of any government measure that can boost the market confidence as strong as slashing the stamp tax," said Zhao Xijun, finance professor of the Renmin University of China. "Time may be the best healer in this case for market sentiments to improve."

Despite yesterday's dive in the benchmark index, Wang Xiaogang, an analyst with Orient Securities, said potential for further drops is very limited. "In spite of tightening monetary measures and uncertainties in the economy, we can still count on a 20 percent profit growth for listed companies, which should keep the average P/E ratio hovering around 16 for the year, which is pretty good."

Li Wenhui, an analyst with Huatai Securities, said June could still provide some cause for cheer to turn the market around.

The consumer price index (CPI), the main indicator of inflation, is likely to drop below 8 percent for May, according to estimates by a number of institutions.

"That will ease concerns about more tightening measures in the form of further interest rate hikes to soak up liquidity," said Li.

The pressure from the conversion of non-tradable into tradable shares is also expected to be much lower in June and July, creating a better situation for a rebound.

Statistics show that 7 billion non-tradable shares from 98 listed companies could be converted into tradable ones in June, amounting to 98 billion yuan ($14 billion), down 65 percent compared with over 280 billion yuan of conversion in May.