China's stock market, already in bear territory with the Shanghai Composite Index down 30 percent from its October peak, could further decline as earnings slow and new share issues create a glut of equities, said Citigroup Inc.
Falling prices of the A-shares traded in Shanghai will "damage earnings growth" at companies as a third of profits in 2007 were from investment gains, Lan Xue, head of China research and strategy at Citigroup in Hong Kong, said in a report dated Tuesday.
Prices also face "massive pressure" from the potential selling of locked-up shares and the supply of new shares through initial and additional stock sales, she said.
"Despite the A-share market having fallen a third from its peak, we believe that the risk of further de-rating is rising," said Lan.
An estimated three trillion yuan (US$420 billion) worth of shares will become tradable this year as their lock-ups expire, according to Citigroup's estimates. New securities accounts are being opened in smaller cities and rural areas, where income levels are lower, the report said.
Stocks have fallen as six interest rate increases last year and other tightening measures raised concern profit growth will slow.
(Shanghai Daily, February 28, 2008)
