The Chinese stock market has remained fundamentally strong
despite the looming threat of a global economic recession and the
battering it took over the past several weeks.
In fact, some analysts say, the sharp fall in A-share prices has
made them increasingly attractive because their current prices
reflect their true worth.
The benchmark Shanghai Composite Index (SCI) has dropped 16.6
percent, wiping out 5 trillion yuan ($700 billion) in market
capitalization since the freefall began on January 21.
Finance leaders from the Group of Seven major economies said at
the weekend that the crumbling US housing market had hurt the world
economy and that conditions may worsen as debt-laden banks clamp
down on credit.
European stocks dropped 1 percent in early trade yesterday but
then recovered slightly.
But the Asian stock market took another battering yesterday
because of the US economic slowdown. The Shanghai and Shenzhen
bourses, however, were still closed for the Spring Festival
holiday. They re-open tomorrow, and the Japanese stock market
resumes trading today.
Despite the drop in stocks in Hong Kong, South Korea, Singapore,
the Philippines and India, the mainland is very unlikely to
experience a bear hug, analysts say.
The average price-to-earnings (P/E) ratio of 300 SCI stocks,
which represent 60 percent of the total market capitalization, fell
to 25 times based on this year's prospected profit earnings, down
from 44.68 times in October when the market peaked. The profit
earning calculation is based on widely estimated 30 percent growth
of annual corporate earnings.
"The sharp falls have largely shaved off the speculative premium
of many high-priced stocks, making them more attractive to value
investors," Changjiang Securities analyst Zhang Fan says.
HSBC Jintrust Fund Management Co investment director Yan Ji says
a sharp drop often creates investment opportunities because the
market fundamentals remain unchanged. This means "the bull run will
not end".
"We, however, cannot invest only by looking at P/E, the technical
factor. We need to observe the whole investment environment," he
warns.
Many mainland brokers corroborate Yan. Shenyin Wanguo Securities
chief analyst Chen Li says the market is expected to remain
volatile till next month. By that time most of the US financial
institutions would have released their annual reports and the
Chinese government announced its financial plan at the National
People's Congress and the Chinese People's Political Consultative
Conference annual sessions.
Globally, several large investment banks have reported losses
because of the US subprime crisis.
The Swiss bank UBS has said it's likely to report a loss of
$11.4 billion in the fourth quarter, far more than $9.8 billion,
already reported by Citigroup and Merril Lynch.
"We don't know what will come next until all the financial
institutions announce their annual reports," Chen says.
The bank's bad performance has heightened investors' worries
over an impending US economic slump that could make stocks across
the world fall sharply.
"But a US economic slump would only have negative impact on
Chinese investors' sentiment, not on China's real economy," Yan
says.
Also, analysts say a US recession is not expected to harm listed
companies' profit growth, even from the aspect of exports.
Investment bank Goldman Sachs' figures show about 90 percent
profits of A-share companies came from China's domestic market in
2006, with only 0.6 percent coming from the US and 0.4 percent from
Europe.
Moreover, listed companies are expected to benefit from the
unified tax system introduced in China from January 1 that cuts the
statutory income tax from 33 percent to 25 percent for domestic
firms.
Does that mean the Chinese economy is detached from the US
economy? UBS Securities Asia senior economist Jonathan Anderson
says: "China is a bit coupled with the US economy, but not enough
to change the fundamental conclusion that China will still be well
insulated at home in a US recession scenario."
(China Daily February 12, 2008)
