Correction is likely to be the main theme in the domestic stock
market this week amid a host of concerns, including high valuations
of stocks, analysts said.
They expect the market to be under downside pressure after the
central government announced over the weekend a rise in the bank
reserve ratio later this month.
The Shanghai Composite Index tumbled eight percent to end last
week at 5,315.54, marking the biggest weekly drop in nine years.
Investors sold shares heavily to channel funds to new shares and
also on fears of more government tightening measures. The key index
had soared almost 130 percent between the beginning of the year and
a record intraday high of 6,124 in mid-October amid a bull run.
"High valuations are the main hurdle to prevent the market from
strengthening," said United Securities analyst Wang Hui. "The
stellar performances of some blue chips, which listed over the past
months, have been inflating the market bubble."
Oil giant PetroChina Co more than doubled on its Shanghai debut
on November 5, becoming the world's largest listed firm by market
capitalization. But its shares soon encountered profit taking on
valuation concerns. This cast a shadow over the overall market,
although PetroChina wouldn't be included in the benchmark until
November 19.
"Compared to the previous occasions, the correction this time
could be longer and the degree could be bigger, as the index had
jumped too high," said Chen Jian, an analyst at Galaxy Securities.
"During this correction, the lowest the index could go to is around
4,800, based on our technical analysis."
The People's Bank of China, the central bank, announced on
Saturday it would raise the reserve ratio for lenders to a record
level on November 26, the ninth increase this year, which could
curb a cash flow into the financial market.
The central bank has raised the ratio once a month, except in
March and July, this year. The Shanghai benchmark, however, rose in
the first trading session following the announcement every time
except the one in September, as investors digested such a negative
move, which typically falls within expectations.
But some investors fear the reserve ratio rise could help cause
the market to decline this time.
"Even so, this could not be the last straw," Pi Haizhou, an
independent financial analyst, wrote in an online commentary. "To
dampen the stock market is not the regulator's ultimate aim. We
have almost completed the return of H shares of major state-owned
firms to the mainland (market), but there's still a long way to go
for red chips. So the task is not quite complete, and a bull market
is necessary to the task for the stock market is far from
completion, and all these need the support of a bull market."
Red chips refer to Chinese mainland companies listed and
registered in Hong Kong, including big names like CNOOC and China
Mobile. The mainland is working on a return of these shares as
under current rules, only locally-incorporated firms can trade on
domestic markets.
(Shanghai Daily November 12, 2007)
