BIZCHINA> Comments & Analysis
Last Tuesday sell-off not Black Tuesday
By Hong Liang (China Daily)
Updated: 2007-03-06 09:55

The Shanghai stock market's nearly 9 percent plunge last Tuesday has been taken by many investors and analysts as the shrillest warning so far of an overheating market that has been sucking in copious amounts of funds from lofty institutions as well as savings from the average person-on-the-street.

But savvy pundits argue against reading too much into such occasional sharp corrections, which they maintain are common for the stock market of a rapidly growing economy as large as that of China. In a statement released the day after the fall, analysts at Union Bank of Switzerland (UBS) dismissed the sell-off as "nothing significant."

Indeed, the Chinese stock market has since stabilized, with the leading indices moving within a much less volatile band. So it seems that the big sell-off was triggered by nothing more than the knee-jerk reaction of many skittish investors after the indices hit a record high the day before.

It may seem hard to believe that billions of dollars of wealth, on paper at least, can be wiped out overnight by the often irrational herd instinct of investors. But coming from Hong Kong, I have seen that happen often.

There is nothing scary about these occasional stampedes as long as the economic fundamentals and the investment climate remain stable, as they are in China. The economy is growing at a brisk pace without causing much inflationary pressure.

To be sure, there is overheating in certain sectors of the economy, particularly property. But the authorities have taken measured steps to rein in bank credit that could be used to feed an investment bubble.

The stock market rally in the past 12 months or so was partly a reflection of the economic boom. With the Shanghai stock index surging more than 130 percent in that period, despite occasional faltering, it is natural to question whether the Chinese stock market is over-valued.

This was apparently the question many investors were asking when they dumped their holdings last Tuesday after the index broke through the previous day's 3,000 point psychological barrier. Some analysts tried to find the answer by drawing a parallel with other markets, particularly Hong Kong, where some of the largest mainland enterprises are listed. They noted that the average earnings multiple of the mainland stock market, at around 40 times, was substantially higher than that of Hong Kong.


(For more biz stories, please visit Industries)

   Previous page 1 2 Next Page