Although the stock market rally in the past year seems to have
lost much of its steam, analysts remain confident of the upward
trend, albeit at a much more moderate curve.
Any notion of a possible meltdown has been largely discarded as
the market still basks in ample liquidity. The rumblings of the US
subprime mortgage crisis sound nothing more than a vague and
distant threat.
So far, government credit tightening measures, including
interest rate increases, have made only short-lived impacts on
investor sentiment because of the lack of leveraged trading. What's
more, the huge supply of new scrips in various mega IPOs were
absorbed without causing any durable liquidity strain.
What's helped cool down the stock market fever a little is
growing investor concern about overvaluation and a possible
slowdown in corporate earnings growth. But with so much liquidity
swishing around the system, none of these factors could squeeze out
the market bull.
"The excess liquidity in the Chinese economy is unlikely to
disappear anytime soon," said Shen Minggao, an economist at
Citigroup.
Shen added that the rising trade surplus and current surplus had
led to speculation on currency appreciation. Capital inflows
through direct investment and current account activities have also
surged.
In addition, recent re-pricing of risk amid the subprime crisis
in developed markets and expected Fed cuts would mean more capital
inflows to emerging market economies.
"We expect in the near term a range-trading or even market
correction in the coming months," said Jerry Lou, an economist at
Morgan Stanley. But as the ample liquidity still remains, "we are
likely to stay bullish for most of 2008".
The government has also announced some measures to encourage
capital outflows, including the qualified domestic institutional
investor system and the "through train" for individuals to invest
in the Hong Kong stock market.
Shen said a liquidity crunch is unlikely in the near term given
foreign investors' increasing interest in renminbi assets, but a
reversal of liquidity flows is still likely as long as the global
market remains volatile.
Corporate earnings growth is expected to slow with the weak
stock market performance because at least one-third of the earnings
growth was a result of the booming market from revaluations of
investment portfolios and capital gains, experts said.
"Headline earnings growth could easily disappoint due to the
role of stock market gains in the profit numbers this year," said
Jonanthan Anderson, senior economist at UBS Investment
Research.
But analysts said a massive market sell-off or meltdown is
unlikely.
"The stock market collapse is not expected to happen because
there is no margin trading system in China," said Cao Honghui, a
researcher with the Chinese Academy of Social Sciences. Unlike the
US consumer, who borrows about 60 percent of what he or she spends,
Chinese consumers are borrowing less than 5 percent.
"We could view a market correction as canceling some positive
effects from the recent rally. Given the authorities' priorities to
maintain social and economic stability, the scenario of a sharp
market correction doesn't look likely in the short term," said
Shen.
Experts said stocks in the consumer sector, such as consumer
products, retail and telecom, are worth investing this year as
their earnings are based on much safer and strong volume
growth.
Asset-price-sensitive sectors, including banks, insurance, real
estate, oil and material are more dangerous to invest in because of
their exposure to tightening risks and US recession.
"Medical consumption companies and electrical appliance
companies are expected to perform well because the government is
expected to invest significantly in the social security and
healthcare systems," said Gui Haoming, chief analyst at Shanghai
Shenyin Wanguo Securities.
"Following slower year-on-year credit growth, financial
institutions should also see slower profit growth in the fourth
quarter as the government calls for credit tightening," said
Shen.
Shen added that share prices of listed banks could be under
pressure, and non-performing loans at some banks could build up if
firms suffer from financial distress in the near future. Those who
rely more on interest income may suffer the most.
(China Daily January 3, 2008)
