Stock answers

"Finally, it feels like freedom from hell," says Li Jianqin, with tears of happiness welling up in her eyes.

And some hell it has been. Tracking the rising shares at the trading hall in Huixin Dongjie street owned by Xiangcai Securities' Beijing branch, the 46-year-old worker felt liberated from that sinking feeling for the first time in months. The giant electronic board at the trading hall, showing nearly a thousand stocks rising to their daily ceiling of 10 percent on April 24, finally lifted Li's sagging spirit.

The rebound seems to be gaining increasing steam. The market surged to 3,693 points on April 30, the last trading day before the May Day holiday, and many like Li feel the relentless stock plunge may soon be a thing of the past.

"Even though the stamp tax cut policy will not influence the market significantly in the long run, the move restored confidence and helped money to flow back into stocks at a time when panic and despair were widespread in the bourse," says Cao Xuefeng, an analyst with China Jianyin Investment Securities.

'How long'?

Even the media mood seems to have shifted since the dramatic surge on April 24, with most commentators now speculating how long the rebound, rather than the downturn, will last. The optimists believe May will see more fireworks from the market, while others worry the government's measures that boosted the market are a shot in the arm but its impact may not last long.

The so-called "rescue measures", including a stamp tax cut from 0.3 percent to the previous level of 0.1 percent on share trading and a new rule requiring that sale of big amounts of shares is conducted on a bloc trading system, helped the major mainland index jump by as much as 9.29 percent on April 24, the biggest gain in six years.

"It will help to lift the index back to around 4000 points in the mid term, but not any more," says Xie Fuhua, an analyst with Bohai Securities. "Investors should not expect this round of rebound to go too far. The market will continue to be volatile because of heavy speculation," Xie warns.

Indeed, the "rescue measures" not merely pushed up good stocks, but junks as well. Concerns about a weak external environment, tightening domestic policies, high inflation and slowing corporate profit growth are weighing on investors.

Some, like Li, say they will recoup their losses and get the hell out if the rebound persists in May. "I know the rebound can't last very long. Besides, I do not think the market will continue to rise, especially after the Olympic Games."

Li says many of her friends, like her, are considering selling all their holdings once the market rebounds to a certain level. "The market is so volatile, and you never know what will happen tomorrow. What I have experienced in the past few months is just too much."

Like many others, Li's nightmares began when the Shanghai Composite Index started sliding from 6,000-plus points. When it slumped to 5,000, she put in an extra 20,000 yuan into the market for some bargain hunting. When the index breached the 4,000-mark, she added more. "Many people I know did the same. I thought the market was bottoming out," Li says. But hell can be bottomless, as Li found out the hard way. By the time the market had collapsed to the 3000 zone, she had little to invest.

Duan Hui, a 29-year old freelancer, who scored big last year, has seen half his earnings wiped out this year. "You must realize that the time when you could pick whichever stock you wanted and still made money, are gone forever. If the market rebounds in May, I will take the opportunity to rejig my portfolio," Duan says. "To survive, one must learn how to pick the right stocks."

"Investors should take the rebound as a good opportunity to optimize portfolio," echoes Shao Jian, fund manager with Harvest Fund Management Co Ltd.

Era of revaluation

In February, the market regulator resumed the approval of new mutual funds. When the index plunged to the 3000 zone, institutional investors including mutual funds, pension funds, insurers and QFIIs (qualified foreign institutional investors) took the opportunity to buy into a beleaguered market.

Li Jing, chairman of JP Morgan Securities' China Equities, points out that QFIIs' interest in stock market is growing since the valuation of A shares started to get more reasonable with the slump. As Chinese regulators have lifted the QFII quota from $10 billion to $30 billion, a part of the additional quota might well be allocated in the A-share market in the coming months.

However, Citi's Shanghai-based economist Ken Peng recently remarked that the government's efforts in past months, such as raising the QFII cap in December and the reopening of the market to mutual funds generated only temporary buoyancy.

No matter how much money the market now allows in, the expected surge of newly freed-up shares in 2009 and 2010 as part of the process of securities reforms, hangs like the sword of Damocles on the stock market.

"The flow of these freed-up shares will fundamentally change the market. The liquidity situation, the valuation of shares and the investment concept will all change," Xie says. The "post-securities reforms" period, as Xie calls it, will see a revaluation of A shares. "It will take one or two years to finish and will result in a market that is much more in line with international norms."

When the market plunged 50 percent since October, the average PE (price to earnings) ratio of A shares, which was as high as 46 in October, fell to 20, closer to the average PE ratio in the world's major stock markets. "With the coming of an era of revaluation, fundamentals should be the core factor determining stock prices," Xie points out.

Indeed, like Duan says, the days are gone when even a complete rookie could play the market and win. Duan, who chased a lot of "pop stocks" in 2007, such as listed brokerages or property companies, says he has learned to pay more attention to companies' fundamentals.

As for the corporate growth outlook for 2008, analysts are split right down the middle. Citi's Peng warns investors that though most firms continue to report high earnings growth, industrial profit growth began to slow in the first quarter. But the cumulative effect of tightening policies and rising factor costs, along with shrinking demand, could cut profits more deeply than what is currently being seen.

But Frank Gong, JP Morgan's chief China economist, says the worst is over. Gong thinks that even though many Chinese companies' profit growth remains zero or even in the negative territory, the appreciation of the renminbi and the reduction of corporate tax will continue to attract investors. Plus, China's economy will continue to grow at around 10 percent in 2008.

"Considering these, Chinese stock have never been so cheap," he says.

(China Daily 05/03/2008 page1)