By Jin Jing (China Daily)
Updated: 2008-02-18 15:47

When asked what touched Chinese people's nerves the most in 2007, the stock market undoubtedly tops the list.

Official statistics show that the number of Chinese equity and mutual fund investors expanded to 138.87 million by the end of 2007, up 77 percent from the year before. Around 500,000 new investor accounts were opened weekly and continued to divert capital from bank deposits to the stock market.

The performance of China's stock market exceeded everyone's imagination. After soaring 130 percent in 2006, the benchmark Shanghai Composite Index continued its strong momentum to gain another 97 percent in 2007, making China's the best-performing stock market in the world.

There were 123 initial public offerings (IPO) launched on the Shanghai and Shenzhen stock exchanges in 2007. A total of 779.156 billion yuan ($108.52 billion) was raised through equities issued on the mainland, topping the world.

It was a year of miracles in China that raised eyebrows across the globe. Industrial and Commercial Bank of China surpassed Citigroup and China Aluminum beat Aluminum Company of America (Alcoa) to become the world's largest company in terms of total capitalization in its own industry. State-owned PetroChina passed ExxonMobil Corp to become the world's largest company with peak market capitalization of $1.2 trillion.

The market value also experienced explosive growth during the past year. The aggregated market capitalization of 1,530 companies listed on two bourses amounted to 32.71 trillion yuan, accounting for 158 percent of China's GDP in 2006.

Some experts said market value is expected to break 50 trillion yuan by the end of 2008, propelled by the return of red-chip companies, the setting up of a second board and the asset injection by State-owned enterprises.

Market scale continues to expand quickly, with a large number of large-cap stocks listing on the mainland. Red-chip companies, including China's largest oil producer PetroChina, China's largest coal producer Shenhua Energy, China Construction Bank and insurer Ping An of China, raised over 14 trillion yuan in 2007.

The number of institutional investors increased and the financial market is expected to open wider to the world in 2008. The government has raised the quota for qualified foreign institutional investors from $10 billion to $30 billion.

The bullish stock market performance has even changed investors' thought pattern. Even though the government has adopted monetary policies to suck up liquidity, the bull has not slowed its pace. The central bank has raised the bank reserve ratio 10 times to 14.5 percent and raised interest rates six times this year.

The market also witnessed its largest ever daily surge of 1,083 percent for a Sichuan-based paper making company a day after announcing its transformation into an underwear manufactures, and a continuous 42 days with a 10 percent daily (the largest daily allowable limits) jump for pharmaceutical manufacture Shandong Jintai Group.

Looking forward to 2008, analysts and economists agree on one thing :uncertainty.

The Chinese government announced it would adopt a tightening monetary policy by the end of 2007. Analysts said the stock market is expected to be more volatile due to increased "uncertainties".

There are many questions that are still waiting to be answered. How tighten the policy will be? What impact the tightening measures will have on the stock market? Where will the market go after the Olympics? When will the index futures be launched?

"The unpredictable government measures intensified the uncertainties hanging over the stock market," says Cao Honghui, an economic researcher with the Chinese Academy of Social Sciences.

However, investors should make their own decisions amid the conflicting messages from the market. Analysts said keeping a calm mind is utmost important.

Reviewing what we achieved in the past year in a calm mind, we will find that behind the glittering facade, there remains room for improvement.

As the world's fourth largest stock market, China's exchange has just 22 percent of free-floating A shares, the rest are held mostly by the government in the form of non-tradable State holdings, according to statistics from UBS Securities Asia Ltd.

In most countries the "free float", which refers to the share of listed companies traded freely on exchanges, is 50 to 60 percent or higher, with the remainder held by the firms themselves.

The actual tradable portion of the equity market is still a very moderate part of financial wealth in China, accounting for around 14 percent of liquid financial assets.

Shang Fulin, chairman of the China Securities Regulatory Commission, recently said that the government will step up efforts to increase the ratio of free-float shares, clamp down on market irregularities and push forward the financial product innovation in 2008.

"The government's decision to develop the bond market, especially corporate bonds, will provide new channels for corporate financing and help diversify the structure of China's capital market," says Wu Nianlu, vice-chairman of the China International Financial Society.