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Stock Market Review

Chinese stock markets have toiled a month for nothing. The Shanghai Composite Index has suffered heavy losses since the beginning of November, closing at 5330.02 on November 8. Global credit concerns, talks of a stock market bubble and central government's measures were cited as factors in the decline.

Just two weeks earlier, the market's rise seemed unstopable: the Shanghai Index, which clocked in an all-time high at 6124.04 on October 16, reopened on October 8 after the week-long National Day break, rising by 2.53 percent to close the day at a new record of 5692.76. The fresh spurt was attributed by analysts to the bull run in other economies in the region during the Golden Week period. The expected launch of stock index futures trading after the 17th Party Congress in mid-October was also seen as driving institutional investors to increase their holdings of large-cap stocks. Expectations of sound corporate earnings in the third quarter also seemed to be adding to the upbeat mood.

The upward trend continued with slight odd dips through the second week of October. The third week opened on a high note as the Shanghai Composite Index broke the 6,000-mark for the first time, with key blue chips such as PetroChina which briefly became the world’s largest company in terms of market capitalization, topping US$1 trillion. In four days of trading, PetroChina (601857) gave back about 20 percent of its IPO high value of 48.60 yuan to trade at 38.20 yuan on November 8.

The market thus took less than two months to gain 1,000 points after crossing 5,000 for the first time on August 23. The key index made steady gains in the following days, with banking and power shares doing particularly well. But in the sharpest correction in over a month, the market dived 3.5 percent later in the week, suddenly threatening to bring the bull run to a grinding halt.

News that the government was studying the possibility of share swaps between stocks listed on the mainland and in Hong Kong raised investor fears of the price gap narrowing between Hong Kong shares and their renminbi-denominated counterparts on the mainland. As A shares enjoy a sizeable premium over their H-share counterparts, most dually listed stocks fell in Shanghai. Editorials on official securities newspapers warning of the risks in the surging stock market also contributed to the sluggish sentiment.

However, stocks rebounded, though slightly, on the last day of the week after the government denied reports that it was studying any share swap proposal. But the rise was small, 0.5 percent, and turnover thin, showing investors remained worried about an imminent tightening policy.

The following week saw more bloodshed as the previous week's losses in Wall Street spilled over to Chinese stocks, with the market plunging 2.59 percent in Shanghai and 3.7 percent in Hong Kong. Sliding 150.72 points, the key Shanghai index continued its four-day plunge. Stocks rebounded briefly in the following days but took another hit soon after by falling 4.8 percent on reports that the consumer price index rose by 4.1 percent in the first nine months year-on-year, prompting concerns of further interest rate hikes.

The index opened the last week of October by jumping 2.83 percent as institutional investors tried to build up a large portfolio of large-cap stocks for the coming stock index futures. The announcement of sound corporate earnings of several large lenders and steel companies also prompted many to raise their investments in large-caps. The gain continued for some time in the rest of the week as liquidity improved following the previous week's IPO-related squeeze and the securities regulator's positive comments about the market.

But the Composite Index closed down 40.48 points on November 1, ending a four-day rise. Stocks were hit hard by the negative sentiment following a report that the Social Security Fund was cutting its investment in stocks.

The slide gained next the week as the index fell 2.48 percent as PetroChina made a strong debut. Large-cap stocks, mainly in banks and real estate sector, plunged as institutional investors made adjustments in their investment portfolio by decreasing the holdings of other large-cap stocks to buy PetroChina.

The ripple effect from the 5 percent fall in Hong Kong shares also dragged down the prices of dually listed stocks. The securities regulator's  warning to fund companies to avoid blind expansion and its limiting of the size of funds at the same level as stipulated in the prospectus within six months also added to investor concerns of further tightening measures.