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Positive factors emerge in Chinese stock market

By Jia Wei (China Economic Net)

17:02, October 26, 2011

Edited and translated by People's Daily Online

Now that effects of Central Huijin Investment's move to increase its stake in four major domestic banks on the secondary market have faded, China's A-share market has again shown a downward trend. It could be said that the fact that the investors who used multiple billions of yuan to speculate on the shares of newly-listed Sinohydro Group, Ltd. and were exposed to potential loss have considerably dampened investors' confidence and disturbed the fragile balance of the A-share market.

Sinohydro's IPO was only an immediate cause of the market slump, while the lower-than-expected third-quarter economic data was the primary cause. Currently, investors are universally worried about the tightening of the market liquidity and the deterioration of listed companies' operating results due to continuing economic slowdown. Therefore, the fall in listed companies' operating results will cause changes in stock valuations and likely push the market down to a lower level.

Furthermore, investors' sensitivity and overreactions to market news should not be ignored. When the market is weak, investors tend to misinterpret some news, understand it from a negative angle and accordingly make inappropriate adjustments. For instance, the latest stress test in the banking sector has shown that even if the housing prices drop by 40 percent, the risks in Chinese banks' mortgage loans can still be controllable."

This is certainly good news for the market, but it has been interpreted by investors that the housing prices will likely drop by 40 percent. Thus, the market will surely fall. Moreover, it is undoubtedly good news for the market that the China Securities Regulatory Commission has adjusted IPO application procedures in order to increase efficiency.

However, investors, who are worried about the expansion in the number of IPOs, have interpreted the news as acceleration in the pace of the expansion. Given the impending large IPOs of companies such as Shaanxi Coal Mining, Ltd. and China Communications Construction, Ltd., investors have again made a negative response to the news. Meanwhile, weak foreign stock markets have also posed an impact on the continued drop in the A-share stock market.

When will the A-share market hit bottom? Several factors suggest that the A-share market is close to bottoming out.

First, China’s central bank recently lowered interest rates on its three-year bills by one basis point for the first time in 15 months, which triggered market speculation about possible relaxation of the existing tight monetary policy.

Second, certain local governments are now allowed to issue bonds directly, which may greatly reduce their reliance on revenue from land sales.

Third, 753 out of 1,043 companies listed on the A-share market said in their earnings reports that they saw net profit growth in the third quarter from a year ago, while 290 said their third-quarter net profit declined. Among the 753 companies, 154 reported an over 100 percent increase in net profit, 149 companies' net profit increased between 50 percent and 100 percent, and 61 companies' net profit increased between 30 percent and 50 percent. Overall, nearly 35 percent of the 1,043 companies enjoyed a more than 30 percent year-on-year increase in net profit in the third quarter.

Fourth, the market value of the non-tradable shares unlocked this week reached nearly 9.1 billion yuan, down 61 percent from last week and lower than weekly average in the past 10 weeks. The sharp reduction in the volume of unlocked shares this week may help stabilize the A-share market.

Fifth, the number of firms listed on the A-share market whose share prices fell below their net asset value increased from eight last year to 23 on Oct. 20, 2011. The share prices of 10 firms reached extremely low levels when the Shanghai Composite Index dropped to 1,664 points and have continued to fall since then.

Sixth, from a technical perspective, the CSI 300 Index is now at the 0.618 retracement level, and the Shanghai Composite Index is likely to rebound when it drops to 2,300 points. Theoretically, after a slump last week, the A-share market may soon see a relief rally if things go smoothly, though the market situation will not improve significantly in the short term.

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