SHANGHAI STOCK MARKET LOSES 65% IN PAST YEAR

tauringhuang.

The Shanghai stock market yesterday hit a 21-month low as investors shrugged off the impact of the Fannie Mae and Freddie Mac bail-outs and a Chinese government attempt to reduce the supply of shares on the market.

The Shanghai composite index finished 2.7 per cent down at 2,143.42 points – the lowest close since December 11 2006. The gains made in 2007, when Shanghai was Asia best-performing market, have been wiped out.

It is now this year's worst-performing market in Asia, with the composite index falling 65 per cent since peaking at 6,124.04 points in trading on October 16 2007.

Hopes that the government would boost the market to coincide with the international prestige of hosting the Olympics proved unfounded, with the index falling by a fifth since the start of trading on the opening day of the games in Beijing a month ago.

The authorities did cut a tax on share trading in April, when the market was worth half its peak value, and the composite index jumped nearly 10 per cent in one day in response.

The fall in prices has brought valuations back to more realistic levels. The market had been trading as high as 50 times annual earnings at the peak in October. That has now fallen to a price-earnings ratio of 11.9 times next year's estimated profits – little different to 11.7 times for the S&P 500 in the US.

Prices have also been depressed in anticipation of previously untraded shares from listings being released on to the market as lock-up periods expire.

Investors seemed yesterday to dismiss the China Securities Regulatory Commission's attempts to address the problem by allowing institutional shareholders of listed companies to issue bonds that could be exchanged into shares later. This should defer the release of some shares on to the market.

Steven Sun, China strategist at HSBC in Hong Kong, called the proposals “a good try” but repeated his call for the government to force state shareholders to give 10 per cent of their previously untraded holdings to the country's National Social Security Fund.

Some disgruntled Chinese investors pointed to the US government's intervention to draw an unfavourable comparison with their own government. “There is no doubt that our government should learn from the American government,” said one comment on a Chinese stock market investor's blog.

Stocks have borne the brunt of Beijing's attempts to tame inflation, which reached a 12-year high of 8.7 per cent annualised in February.