HONG KONG - Stock markets in China, whose government is one of the biggest
holders of debt issued by Fannie Mae and Freddie Mac, alone among Asian markets
failed to gain in the wake of the US government's weekend bailout of the two
mortgage finance companies.
The Shanghai Composite Index fell 2.7% on Monday to a 21-month closing low of
2,143.421, and the benchmark for the country's smaller exchange, the Shenzhen
Composite Index, dropped 4.1%.
In comparison, Hong Kong's Hang Seng Index closed up 4.3%, led by HSBC
Holdings, Europe's largest bank, whose share price
gained 5.5%. In Japan, the Nikkei 225 jumped 3.4%, Sumitomo Mitsui Financial
Group leading the way with a 15% price surge.
The Chinese government holds upwards of US$370 billion of debt in Fannie Mae
and Freddie Mac, which is now guaranteed as part of the bailout announced by US
Treasury Secretary Henry Paulson. The latest Chinese market declines brought
public calls for the communist government to imitate capitalist Washington in
acting to protect investors.
Chinese investors, who have seen the Shanghai Composite Index tumble more than
60% this year, are holding back from buying stock fearing further declines as
billions of new shares come on the market following reform of holdings in
state-owned companies that make previously non-tradable stock tradable.
Jing Ulrich, chairman of China Equities for JPMorgan Securities said sentiment
on the part of Chinese mainland investors has shown little correlation with
global market movements, also citing among other factors government to rein in
inflation and cool the fast-growing economy.
"Domestic investor sentiment has turned negative this year on concerns over the
overhang of non-tradable shares, a cyclical downturn in key sectors and
macro-tightening measures, which have had a disproportionate impact on major
companies within the listed universe," she said.
"Recent measures to support the market have had only a temporary effect, while
expectations of a fresh market-boosting initiative in the runup to the Olympics
failed to materialize."
The China Securities Regulatory Commission (CSRC) last Friday proposed allowing
shareholders of unlocked newly floatable shares to issue exchangeable bonds,
which could ease oversupply of new shares and attract new sources of funds to
the A-share market from traditional fixed-income asset investors.
However, Ulrich said that with share valuations now at more reasonable levels,
a range of stocks in key sectors now appear oversold.
At their peak in October 2007, A-share were trading at average price-earnings
ratios of 52.8, three times higher than those of US stocks. With the sharp
correction on the markets, those ratios have come down to 18.7, but are still
high relative to other major Asian markets, Ulrich wrote in her research note
on last month.
The global economic slowdown and the fiscal stimulus package in the US earlier
this year have had little impact on China "as the mainland stock markets are
affected by their own problems", Hu Weitao, chief investment officer of
Valuefinder Investment Management in Shenzhen, said. "The root of the unstable
domestic markets is non-tradable shares."
At the end of June, 290 billion yuan (US$42.4 billion) in unlocked shares were
sold compared with 185 billion yuan invested in mutual funds.
Yet in a move that merely heightened concerns, the Shanghai and Shenzhen stock
exchanges last Friday shortened to one year from three years the lock-up period
that prevents strategic investors - those who buy placed shares within the 12
months before an initial public offering - from selling their holdings. That
further adds to concern about too many shares flooding the market.
"How can the markets rebound under such negative moves" by the government, Hu
said.
An alternative to cushioning the impact of new shares, a "windfall" tax on when
strategic investors sell holdings on the expiry of the lockup period, was ruled
out by the CSRC on September 2.
The absence of positive measures by Beijing has brought negative comparison
with the US government's fiscal stimulus package earlier this year and other
action by Washington.
"A capitalist country is acting to save the market and protect investors while
China's government has sat idly by," a blogger on www.163.com asked. "How can
Chinese stock investors not be sad? How can they not lose confidence?"
Another forlorn comment on China, biggest web portal, Sina.com, was even more
explicit.
"[Let's] hope that China's stock market will get government help like Fannie
Mae and Freddie Mac, not just offering lip service," a blogger named Bang Ni
wrote.
Olivia Chung is a senior Asia Times Online reporter.
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