News Analysis: Chinese Stock Market Experiences Growing Pains

Chinese shares have fallen markedly since late July, with the drop exceeding 15 percent. Stock prices of the Shanghai and Shenzhen markets have dropped 600 to 700 billion yuan in value, arousing public concern.

The Shanghai stock composite index totaled 2,100 points on July 23, the highest point in recent trading. However, one week later the index fell 108 points on a single day, ending a two-year bullish trend.

One view on the dramatic change was that many negative factors, such as the reduction of state-owned shares, the increase in new listings, the Central Bank's declaration to check illegal funds and the stagnation of international markets, dampened the confidence of the public.

Recently the most successful listed company, Yinguangxia, was reported to have been involved in severe fraud, causing a shock to the stock market and investors.

Wang Guogang, the director of the Finance Study Center of the Chinese Academy of Social Science, said that the reasons for the present phenomena are complex and comprehensive. Investors should have a rational attitude towards the situation in which some negative effects seemed to have been exaggerated and certain measures have to be regarded as corrections in the market, he said.

Most experts believe that the slump exposed certain latent problems in China's stock market. In order to assimilate more capital, some listed companies tried to deceive investors. And bankers, for some time, controlled the prices intentionally by utilizing tremendous funds while occasionally allowing illegal capital to flow into the market.

Earlier this year, Wu Jinglian, a famous Chinese economist, pointed out that China's securities market had some problems and needs standardizing, which evoked contention within economic circles at the time.

In fact, the China Securities Regulatory Commission (CSRC) did enhance its supervision on the market, including measures to compel companies continuously in the red to leave and to punish illegal institutional investors with more fines. More recently, the CSRC ordered credit funds to be removed from the market.

Although experts held that China's securities business still has a long way to go before reaching maturity and will experience some pain and even temporary suffering from time to time, no one doubts the bright future of the market.

Luo Feng, an employee with the Galaxy Securities Research Center, said that in the long term, China's well-performed macro- economic situation will continue and the foundation of the bull market remains.

The economy will gradually be fueled by China's imminent accession to the World Trade Organization and Beijing's successful bid for the 2008 Olympics. The achievements of listed companies improved greatly in the first half of the year. All these basic elements will combine to serve as the powerhouse behind the securities market, he added.

In terms of the capital flow, even when more illegal capital was discovered and the state-owned shares were reduced, the capital in the main board hit 660 billion yuan, showing the abundance of periphery funds.

After the slump, China's securities market had, to a large extent, rid itself of the previously accumulated risk), which will contribute to booming the future stock market.






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