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18 Jun 2008

Financial Markets

Interesting Aspects and Outlook for Chinese Stock Markets(Current Issue No.2080)

On June 12, the Shanghai Composite Index fell to the lowest level in 14 months, closing at 2,957.53 points, falling 43.8 percent from the end of last year, which was considerably lower than the 96.7 percent rise seen last year – but now the biggest plunge among stock markets globally – due to both internal and external factors. External factors responsible for the sagging Shanghai Composite Index include record high oil prices that have triggered concern about spiraling inflation and widespread speculation that the People's Bank of China (PBOC) may decide to undertake stricter monetary policy in the future (after the PBOC instructed commercial banks to increase their reserve requirements by 1 percent to 17.5 percent on June 7). There was some concern about a possible recession in the US, as well. Internal factors include concern about the shrinking earnings seen at listed companies and a larger volume of shares to be released onto the stock market after the end of the ‘Silent Period'. The recent earthquakes have also fueled concern about rising inflation that may force the Chinese authorities to undertake more rigid monetary policy.
Despite a fall in the Shanghai Composite Index this year, the belief that the Chinese authorities still have an important role in the movements of their stock index has led investors to speculate that the government will eventually launch measures to stabilize the market and spur stock trading when it becomes sluggish, particularly prior to the Olympic Games in August. The significant psychological level forecast by the market was 3,000 basis points, but the current index has already dropped below the speculative level. It is evident from the introduction of regulatory controls on share sales after the end of the Silent Period where shares must now be sold through the Block Trading System only. The Chinese authorities also decided to reduce the duty stamp tax on stock trading to 0.1 percent, versus the 0.3 percent before, effective April 24.
At present, China is gradually reforming their stock market to match international standards. They are also transforming various economic sectors into market-based systems. China is also allowing greater participation by foreign investors in their capital market. The Chinese authorities have modernized their capital market structure in many aspects. e.g., offering market access to their securities business per WTO commitments. They are also allowing foreign securities firms to undertake direct transactions in the B-Shares Market, and permitting foreign institutional investors to enter into joint venture fund management companies and securities firms. As of April 2008, there were 31 joint venture fund management companies and 7 joint venture securities firms established. Moreover, more opportunities have been available for foreign institutional investors to invest in the A-shares market. This must be undertaken via the qualified foreign institutional investor project. Domestic institutional investors with restricted qualifications, under the qualified domestic institutional investor project, have been allowed to invest in specific types of foreign securities. The most important change in their attempts to reform the Chinese capital market is the non-tradable share reform.

KASIKORN RESEARCH CENTER (KResearch) expects that recent developments in the Chinese stock market will help lift their importance in the global capital market in the future. This can be seen from increases in the ratio of Shanghai's market capitalization to the world's total market capitalization. Meanwhile, it is expected that continued economic growth in China will prompt Chinese companies to seek more funding from domestic and overseas sources. This would be consistent with the Chinese government's attempt to ease regulations allowing their private companies to list in foreign capital markets, so it is expected that the size and number of Chinese companies listed in foreign markets will expand in the future, making them more influential toward movements of foreign stock market indices. In addition, the attractive size of Chinese stock markets will induce investors and foreign funds to put more weight into Chinese stock in their portfolios. As for any impact on the Thai stock market, although foreign capital movements into and out of Chinese stock markets are quite restrictive, it is undeniable that any adjustments in their stock markets have a psychological impact on other regional stock markets because they reflect what is going on with the Chinese economy. Meanwhile, the expected strengthening of the Yuan against the US Dollar would support for other regional currencies, thereby supporting greater investment and capital inflows into other stock markets in the region, as well.

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Financial Markets