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Bear hug deals blow to bull marathon

By Zhou Yan (China Daily)
Updated: 2009-02-20 08:01

Just as Chinese investors were rejoicing over the slaying of the bear that ran amok in the domestic stock market for most of 2008 and early 2009, another one has been sighted in the past several days.

The recent bear run has wiped out a total of 1.19 trillion yuan in market capitalization. On Tuesday and Wednesday, when the key indicator fell by a total of 180 points, it ended a straight 26 trading day bull run since the beginning of February.

Even the most seasoned of investors, who had experienced the agony of the big market crash of 2008 that sent prices down by an average of 60 percent in less than six months, said they were dismayed by the severity of the latest correction.

"The quest for the bull has remained elusive," sighed Yang Hong, a 50-year-old housewife who had lost a big chunk of the money she had invested in the stock market two years ago. "The rally in the past several weeks was nothing more than an illusion."

Early last week, the Internet was rife with analysis by many self-styled investment gurus proclaiming the dawn of a new age in which the bull would reign supreme.

Indeed, the gain in that rally was impressive. The benchmark Shanghai Composite Index went up by a total of 29.6 percent in 26 trading sessions. In the process it cut through the so-called "psychological barrier" of 2000 points like a hot knife through butter. The index closed at a high of 2389.39 points on Feb 16, with the prices of 621 out of 1,575 A-shares having gained by over 50 percent.

The combined turnover on the Shanghai and Shenzhen bourses also touched new highs since the market crashed in late 2007, reaching a peak of 270 billion yuan on Monday.

"China stocks' robust run since the Lunar New Year holiday has been impressive and not without key fundamental and technical support. However, considerable market headwinds still remain," said Michael Kurtz, an analyst with financial services provider Macquarie.

Indeed, backed by the central bank's injection of liquidity this year and domestic lenders' aggressive lending activities, the domestic broad money supply (M2) has risen by 18.8 percent from the previous year.

In January, the bank's new loans surged to 1.62 trillion yuan, more than double the amount in 2008.

"That the massive government investment has seen a 'squeezing effect' on the real economy, plus the related monetary policy providing excessive liquidity in the financial sector, have pushed more cash into the stock market," said Wu Feng, an analyst with TX Investment Consulting Co Ltd.

Mixed reactions

Opinions on the short and mid-term trend of the market are varied.

Over 90 percent of the analysts have expressed a positive sentiment with regard to the market trend going forward, according to a survey of 12 large domestic brokers polled by Shanghai Securities News this week.

Most of the brokers have predicted that the current upswing would continue to extend until the National People's Congress and Chinese People's Political Consultative Conference to be held in March.

Haitong Securities noted that the current turnaround was a technical correction, and that the market will pick up soon given the reasonable valuation of A shares and liquidity.

The dynamic price-earnings ratio this year has gone up by 20 times, up from around 15 times earnings per share in late December, according to TX Investment Consulting.

However, given the uncertainties on the economic front and upcoming tough earnings seasons, more brokers have expressed concern about the market.

"The subsequent buying strength was probably overdone last week, and it's probably too early to say it's another bull market because the news flow over the next few months may still be negative," said Lorraine Tan, director at Standard & Poor's (S&P) equity research in Singapore.

"I would probably wait for signs of stability in the second quarter and see how the market reacts up till then," Tan said.

Results drag

The first quarter GDP growth in China will probably slow to below 6 percent, Tan noted, adding that the coming earnings results and delayed recovery of the US economy may further weigh down the market.

"The next 10 weeks will see the bulk of Chinese full-year 2008 corporate earnings releases. More than one-third of Chinese firms have already given their guidance for the year, but considerable downside risks remain, in part due to balance sheet exposure from inventories and account receivables," said Macquarie's Kurtz.

The best hope for substantial near-term upside probably lies in 'panic buying' by managers who missed out on recent gains, he noted.

China Merchants Securities also wrote in a research note that, shadowed by the earnings contractions, the rapid growth of the P/E ratio in the Chinese market amid a 50 percent rise of A-H share premiums indicated a bubble in valuations.

"As equity markets tend to look forward by at least six months towards corporate earnings recovery in 2010, we expect the Shanghai Composite Index to hit 2700 by the year end," Tan predicted.

Economists also expressed their concern on the domestic economic environment.

"Consumer price index inflation joined recent data in showing that the severe deterioration in macro conditions late last year is easing somewhat. But the demand recovery necessary for a durable return of pricing power is still absent despite the stimulus programs. A flushing of liquidity alone does not force people to buy things. China remains on a deflationary path, which is still far from being restrictive for monetary policy," said Ken Peng, an economist with the Citigroup in Shanghai.

In addition, a China research team from Morgan Stanley also expressed their skepticism on the persistence of the liquidity-driven new loan surge, saying that it was unlikely that "the fat pace of credit expansion is sustainable beyond the very short term".

As for individual investors, their anticipation about the market prospects were also mixed.

Zhang Ping, a 26-year-old worker at an export firm, said that the current recovery signals the coming of a bull market. "I still hold the money, but will invest more when the next round of recovery extends a bit longer," Zhang said.