Chinese Stocks Face Biggest Monthly Drop Since 1995 (Update1)
By Chua Kong Ho and Zhang Shidong
Nov. 29 (Bloomberg) -- Chinese stocks are poised for their steepest monthly decline since at least 1995, as the government deflates a bubble that caused prices to quadruple in a year.
The Shanghai Composite Index fell 19 percent so far in November, the most since February 1995, when Bloomberg started keeping records of the benchmark. Shares in the index trade at an average 44 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 17 times profit.
While this year's rally turned Beijing-based PetroChina Co. into the biggest company by market value and made Industrial & Commercial Bank of China Ltd. the largest bank, five interest rate increases by the People's Bank of China and higher taxes on trading shares sent the index down 21 percent from its Oct. 16 record. The last five times the Shanghai Composite Index dropped 20 percent or more from a high, losses deepened to an average 35 percent before recovering, Bloomberg data show.
``The risk facing the stock market is considerable now, as the government is trying to squeeze an asset bubble,'' said Zhang Ling, who manages the equivalent of $1.1 billion with ICBC Credit Suisse Asset Management Co. in Beijing.
U.S. billionaire Warren Buffett said last month investors should be ``cautious'' about China's stock market. Six months ago, Li Ka-Shing, China's richest man, said it ``must be a bubble.''
The decline in China compares with a 21 percent decrease in Japan's Topix index from its February record to Nov. 22, the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse.
`Bear Market'
The two-year-old CSI 300 Index, which tracks shares on both the Shanghai and Shenzhen exchanges, fell 18 percent this month, the most since it started in 2005, and is down 21 percent since its record close on Oct. 16. A 20 percent drop within 12 months is considered by traders as the start of a bear market. The CSI 300 is still the world's best-performing national index of the 90 benchmarks followed by Bloomberg.
``It's far too early to talk about a prolonged bear market as domestic demand is still strong,'' said Leo Gao, who helps manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai. ``We could see a rebound when banks get their fresh quota of loans in the new year.''
The Bank of New York China ADR Index, tracking the nation's American depositary receipts, gained 4.3 percent to 583.27 as of 12:49 p.m. in New York.
The MSCI Asia Pacific Index, a regional measure, retreated 8.9 percent since reaching a record on Nov. 1. In the U.S., the S&P 500 fell 8.8 percent from its 2007 closing high on Oct. 9 because of the worst housing slowdown in 16 years.
PetroChina, Exxon, GE
Chinese stocks rose as households shifted more of their $2.3 trillion of savings into the equity and property markets in search of returns that beat inflation. The yuan's 6.1 percent appreciation against the dollar in the past year has also increased the appeal of assets denominated in China's currency.
Chinese companies have sold 420 billion yuan ($57 billion) in stock this year, more than in the previous five years combined, according to data compiled by Bloomberg.
PetroChina, the nation's largest oil producer, almost tripled on its first day of trading in Shanghai on Nov. 5. It became the world's first company valued at $1 trillion, more than Exxon Mobil Corp. and General Electric Co. combined. The stock has slumped 34 percent from its high.
The Shanghai Composite Index, developed in December 1990 to track stocks listed on the bigger of China's two exchanges, plunged by more than 50 percent in the last bear market, from June 2001 to July 2005. It has jumped almost fivefold since its low on July 11, 2005.
`Selling Pressure'
``The market is facing more selling pressure, either from the regulatory front or the valuation perspective,'' said Yan Ji, an investment manager in Shanghai for HSBC Jintrust Fund Management Co., which oversees the equivalent of about $517 million. ``What we have seen now is only the start.''
Most overseas investors are prohibited from investing in China's yuan-denominated A shares, which are listed on exchanges in Shanghai and Shenzhen. UBS AG, based in Zurich, and Goldman Sachs Group Inc. in New York are among more than 50 international institutions approved by China's regulators to invest in the mainland markets.
The People's Bank of China ordered banks this month to set aside the highest level of deposits as reserves since at least 1987 to slow the economy's 11.5 percent annualized growth in the third quarter. Consumer prices rose 6.5 percent in October from a year earlier, matching a more than decade-high, compared with the one-year bank deposit rate of 3.87 percent.
The government is also encouraging overseas securities investment to prevent domestic markets from rising too fast. Chinese financial institutions, including brokerages, fund- management firms and banks, have been approved to invest a total of $34.5 billion outside China under the qualified domestic institutional investor, or QDII, program.
To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net ; Zhang Shidong in Shanghai at szhang5@bloomberg.net . |
