Market Highs Come With Wobbles

Related entries: Economy, General, Investment, Research, Risk & Law

It was a good year for China’s stock market last year, after a 4-year slump, and it set a new record on the final day of trading, according to China Daily:

    “China’s stock market soared to an all-time high on the last trading day of 2006, as a flood of fresh investment funds boosted the benchmark index up 4.2 per cent and brought its total gain for the year to 127 per cent. The Shanghai Composite Index closed at 2,675.474 points on Friday with the second-biggest daily percentage rise this year. Turnover in Shanghai A shares totalled 58.75 billion yuan (US$7.5 billion), its second-highest level this year.”

Why the turnaround? China Daily provides some suggestions:

    • Strong economic growth

    • Market reforms

    • Inflow of funds with big, new listings

    • Anticipation of the corporate tax law in 2007 together with a forecast growth in corporate profits (NB Forbes reports that a Ministry of Finance official has said the new tax law will not come into force before early 2008, and that there will be a 5-year adjustment period)

All this action has meant great returns for funds that had exposure to China, and Bloomberg reports that they were some of the best-performing funds in the world.

    “The world’s best-performing mutual funds last year invested in China, and made the biggest bets in just a few companies. They’re counting on the same strategy for 2007, targeting banking, insurance and real-estate stocks. Five China funds led 1,506 stock funds with at least $1 billion in assets, according to data compiled by Bloomberg.”

However, while the picture is China is painted as rosy, there are still plenty of questions about corporate governance, regulation, and fickle retail investors.

Some of those same issues have lead to worries about the Chinese companies that are listing overseas on markets such as London’s (smaller listing) AIM market. There were some signs of nervousness last year – during which, according to the FT, 26 new Chinese companies joined the market, taking the total to (a very unlucky!) 44. This year has started with the announcement that China’s Noah, a producer and distributor of electronic learning products, was pulling its planned AIM floatation (with Evolution China Securities). Other “high-profile Chinese wobbles” reported by the FT include:

    • “Bodisen Biotech, a Chinese organic fertiliser company with a dual listing on the American Stock Exchange, announced that Amex had written to the company warning it ‘was not in compliance with certain of the Amex continued listing standards’.”

    • “Prosperity Mineral Holdings, a cement manufacturer and iron ore trader based in Hong Kong, put out a profits warning only four months after listing.”

One investor – the short-seller Simon Cawkwell – is reported by the FT to have written “to both Aim and the Financial Services Authority complaining that several Chinese companies had listed ‘without adequate due diligence and that a disaster is looming, which will…tarnish the reputation of the Square Mile’.”

No doubt it would also tarnish the reputation of Chinese companies…and the people that invested in them. To avoid tarnishing, China Business Blog recommends polishing up on due diligence in 2007.

See news sources:

    China’s stock index on all-time high
    China Daily – China
    By Fei Ya (China Daily). China’s stock market soared to an all-time high on the last trading day of 2006, as a flood of fresh investment …

    China Funds Led World in Returns Last Year as Japan’s Flopped
    Bloomberg – USA
    4 (Bloomberg) — The world’s best-performing mutual funds last year invested in China, and made the biggest bets in just a few companies. …

    China’s Noah drops plan for listing on Aim
    Noah, a Chinese producer and distributor of electronic learning products, has dropped plans for a flotation on Aim, the London Stock Exchange’s market for smaller companies.

3 Responses to “Market Highs Come With Wobbles”

  1. Jeremy Gordon Says:

    One trillion reaons to be merry. But for how long?:

    “Jan. 11 (Bloomberg) — China’s stocks surpassed $1 trillion in value after major benchmarks rallied and the government encouraged the domestic listing of state-owned companies such as Industrial & Commercial Bank of China Ltd.

    The combined capitalization of shares listed on the Shanghai and Shenzhen exchanges rose to $1.01 trillion yesterday, according to data compiled by Bloomberg. China now ranks as Asia’s third-largest market, after Japan’s $4.8 trillion and Hong Kong’s $2.1 trillion.”

  2. Archive » Bubble Trouble| China Business Blog Says:

    […] l. And there is plenty of talk about a big fall in China’s recently stellar markets (see “Market Highs Come With Wobbles”). According to the FT the bubble is now official: […]

  3. Archive » Mainland Markets Trump Hong Kong| China Business Blog Says:

    […] Hong Kong Related entries: General, Investment, News, Economy China’s surging stock markets, have now overtaken Hong Kong in terms of market capitalisation, according […]

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