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Stock market braces for more gloom

By Jin Jing (China Daily)
Updated: 2008-07-02 07:14

Wang Jiacheng, a 52-year-old doctor, entered the stock market a decade ago.

"I will sell my stocks for other investment opportunities when they come, because of uncertain market conditions both globally and domestically," Wang said.

He has lost more than 50 percent of the 500,000 yuan he had in stocks.

"It is difficult to say when the Chinese stock market will mature, as there are lots of young speculators in the market, and government regulatory supervision still needs to be enhanced," the doctor said.

The benchmark Shanghai Composite Index fell 55 percent from a high of 6092 points in October last year, to 2736 points at the end of last month. The Chinese market saw the largest fall in the world in the first half of this year, despite the country's real GDP growth remaining above 10 percent in the first quarter.

"The sharp correction in China's stock market has again shown its divergence from economic fundamentals The market volatility could be hinting at an unrealistic economic outlook," said Shen Minggao, an economist at Citi China.

Meanwhile, current low-priced stocks are not attracting bargain hunters, with stock trading shrinking sharply this year.

The valuation of A-share companies had also been cut from as high as 43.7 times earnings per share last year to 18.5 times. Investor enthusiasm for stock investment remains low, with the number of new A-share accounts opened in May dwindling 81 percent from last year to 5.6 million.

Monthly stock trading turnover contracted 71 percent from a high of 5.74 trillion yuan last May to 1.67 trillion yuan this June.

Corporate earnings are expected to slump further because of soaring raw material costs, price controls by the government and tightening credit, analysts said.

Similarly, profit growth of Chinese industrial enterprises fell sharply to 20.9 percent during January to May this year from 42.1 percent a year ago, the National Bureau of Statistics reported.

"We expect further weakening in profitability in the second half of this year, as exports and consumption weaken, reducing firms' incentives to invest and unmasking more overcapacity," said Sun Mingchun, an economist at Lehman Brothers.

"Profit may have been redistributed unevenly. Price adjustments may benefit input and final goods sectors at the cost of midstream manufacturers. Firms that are unable to raise prices or cut costs could vanish, and industrial consolidation will follow," Citi China's Shen Minggao said.

Corporate earnings are also expected to suffer because of declining investment income, which accounted for only 17.47 percent of total corporate income in the first quarter, down from 20.65 last year.

However, economists are widely expecting a decline in the consumer price index in the second half, which should reduce the urgency for interest rate hikes that will further squeeze corporate earnings.

"Overall food prices are likely to remain unchanged or fall slightly in June from May," Sun said.

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