Chinese stocks under pressure

08:30, December 13, 2010      

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Analysts said the China stock market is under downward pressure as tighter monetary policies bombard the fastest growing major economy.

"Investors should consider the changes in economic policies outlined by the Central Economic Work Conference last weekend. A new interest rate hike may come soon," said Yang Chengzhang, chief economist at Shenyin & Wanguo Securities Co Ltd.

China stocks will not rebound rapidly. Some investors have noticed the policymakers' determination to fight explosive liquidity, Yang said.

The People's Bank of China (PBOC) expects continued monetary normalization in the coming months, Wang Qian, an economist at JP Morgan Chase said in a report. "We look for two more reserve requirement ratio (RRR) hikes and three more interest rate hikes in following quarters," he said.

The National Bureau of Statistics (NBS) announced that China's inflation rose to 5.1 percent in November, reaching a 28-month high. The growth was driven by an 11.7 percent rise in food prices. The figure was 10.1 percent in October.

"Prices will stay stable in the future so long as ministries and regional authorities seriously implement the central government's measures on checking prices," said NBS spokesman Sheng Laiyun.

China's central bank on Friday announced the third hike of the RRR for banks to curb accelerating inflation.

China's broad money supply (M2), which covers cash in circulation and all deposits, had increased 19.5 percent year-on-year to 71.03 trillion yuan ($10.76 billion) at the end of November.

It may develop stock bubbles if the POBC only increase the RRR but doesn't raise interest rates, said Lu Zhengwei, chief economist at Industrial Bank.

"The next year's consumer price index must be higher, so it is wiser for the government to raise interest rates by the end of this year, which can effectively relieve the inflation pressure in 2011," said Lu.

The Shanghai Composite Index has extended to a loss of 13 percent this year, and it has declined by 10 percent since a surge on Nov 8, according to Bloomberg News.

However, because the country's monetary policy became clearer after the economic conference, a turning point may appear in the stock market, and the share prices may turn up afterwards, said Gui Haoming, an analyst at Shenyin & Wanguo Securities.

"The market showed a rebound sign on Friday when the stocks climbed 1.1 percent at the close," said Gui.

Source:China Daily
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