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Stock Market Review

In early December, the Shanghai Composite Index reversed its downward spiral in much of November to close the first at 5092, 300 points above the crucial support level of 4800 in an atmosphere influenced by the central government’s tight credit policy, which is bent on cooling down the overall economy and curbing inflation.

After the market closed on Friday December 7, the People’s Bank of China, the country’s

central bank, announced a full 100-basis-point increase in reserve requirements on bank deposits to 14.5 percent. This tenth hike of the year was the largest in four years with the reserve rate being the largest in a decade.

However, the bad news was offset by an announcement that Foreign Qualified Institutional Investors (QFII) can now increase their investments to US$30 billion. The Shanghai composite responded with a strong performance, closing the morning session on the following Monday up 1.2 percent at 5151 with financials and real estate sectors expected to decline for the session.

The strong performance in early December breathed some sign of life into an otherwise lifeless market in much of November. The mainland stock market began November on a dull note with the benchmark Shanghai Composite Index falling 40.48 points on the month’s first trading day and another 2.31 percent the next day. News of offerings by industrial giants and a State Council official’s warning that Chinese share prices were rising much faster compared with the rest of the world dampened market sentiments, as did a report that the Social Security Fund was cutting its investment in stocks.

The trend remained more or less downward for the rest of the month, with the benchmark Shanghai index tumbling 18.19 percent for November, the largest monthly percentage drop in 13 years.

The slide that began in the first week picked up steam in the following week as the index fell 2.48 percent on the first day of trading that week. Large-cap stocks, mainly in banking and real estate sectors, plunged as institutional investors adjusted their portfolios by pulling out of large-caps.

The ripple effect from a 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 added to investor concerns of further tightening measures. 

The rest of the week saw a steady fall in share prices, with the index finishing the week at 5,315.54 points.

Market movement was largely influenced by the new heavyweight PetroChina falling steadily after its successful debut which now accounts for 25 percent of the whole weight of counters for the Shanghai Composite Index. Predictions of accelerated appreciation of the renminbi also cast a shadow on the market. The index lost 8 percent in the second week’s trading, the biggest weekly loss in nine years. Turnover also dwindled, with analysts saying investors’ reluctance to trade partly stemmed from the central bank’s warning signal on inflation in a report on monetary policy and the consequent fears of further tightening measures.

The next week also witnessed steady fall in share prices following the government’s move over the weekend to raise the reserve requirement ratio for commercial banks by half a percentage point. At 13.5 percent, the bank reserve requirement ratio stood at a 10-year high, affecting investor confidence already hit by Wall Street’s decline in the preceding week.

The key index took another beating following the release of strong inflation data for October, raising investors fears the central bank could raise interest rates further to reduce liquidity. The consumer price index (CPI) rose 6.5 percent in October compared with the same period in 2006. The figure was up from the 6.2 percent recorded in September.

But midway through the week, shares rebounded briefly ending four straight trading sessions of decline, with the index soaring nearly 5 percent. Investor confidence was largely boosted by an overnight Wall Street rebound and a strong performance of Hong Kong shares, along with media reports that new mutual funds might be approved for subscriptions.

But the index returned to its downward trend thereafter amid expectations of the year’s sixth interest rate hike, closing the week at 5,316.27. The slide continued into next week, which saw a bit of a see-saw. The market was seen to be under pressure with money frozen in subscription for new stocks and the tightened monetary policy beginning to kick in. The Shanghai Composite Index finally finished the week at 5,032.13 points, recovering slightly because of a technical correction after plunging 4.41 percent on Thursday.

Share prices lost nearly 3 percent in the first two days of the last week of November before rising briefly by 4.16 percent on Thursday amid reports that tax burden on listed firms could be reduced. Stocks, however, fell 2.63 percent the very next day, making the key index close the month at 4,871.78 points.

The mainland stock market Stock prices continued to be lackluster in the first week of December, with mostly minor swings and just one brief spurt of 126.76 points, or 2.58 percent, midway through the week before closing the week at 5092. China Railway Group made a strong debut on the Shanghai Stock Exchange on the first trading day of December as its shares closed 68.54 percent up over its initial public offering price.