Thu, Jan 25, 2007 - Page 11 News List

Soaring stock prices put PRC in difficult position

STOCK MARKET FEVER Regulators are faced with the decision to curb share prices at the risk of causing a tailspin, or possibly dealing with a market crash later on

AFP , SHANGHAI

A year-long rally in China's stock markets has prompted concerns of a bubble, but the government is treading warily about cooling prices for fear of engineering too sharp a correction, analysts said.

Regulators are in an extremely difficult position because they are loath to apply the brakes for fear of sending share prices into a tailspin, but delaying necessary cooling measures could eventually prove extremely costly, they said.

"Few people in the short term are unhappy about the stock market going up, so the government does not have a strong incentive to crack down," former Morgan Stanley economist Andy Xie (謝國忠) said. "But they are worried that if it goes up too fast and then crashes, a lot of people will be unhappy."

Gains for the key Shanghai composite index over the last year are about 150 percent in what is a remarkable but increasingly dangerous reverse from 18 months ago when prices floundered at eight-year lows.

The benchmark Shanghai Composite Index closed yesterday up 25.99 points, or 0.88 percent, at 2,975.13, marking another historic high with turnover near peak levels at 97.52 billion yuan (US$12.55 billion).

Huge fund inflows from institutional and retail investors have pushed company stock valuations well above levels that correspond to company earnings, analysts said.

But given the massive fund inflows, curbing investor enthusiasm will be difficult and prices are likely to climb, said Standard Chartered economist Jason Chang.

"In my view there is the possibility of an asset bubble building because at the moment liquidity is still huge and with the macro-controls on real estate we are seeing a lot of money being transferred from the property market to the A-share market," Chang said.

China's stock market fever was initially triggered by the start in April 2005 of a complex overhaul of state-owned shares that forced companies to convert non-tradable stocks held by the government.

With that reform seen as successful, regulators were now in an awkward position as they were afraid of a major correction, said Shen Jun, an analyst with Guosen Securities based in Shanghai.

Although the unprecedented gains are also supported by earnings from the country's production and export machine, which has created the world's fourth largest economy, regulators have begun to voice concerns.

On Monday China's chief stock market regulator Shang Fulin (尚福林) warned in comments carried by the state press the foundations of Chinese bourses remained rickety.

"Recent positive changes in the market are only initial and temporary, and long-standing internal and external factors hindering the healthy development of the market have not changed fundamentally," Shang said.

Reports have also begun to emerge this week that the government has quietly delayed the launch of index futures contracts.

"We heard from comments from [market regulators] that they may postpone the introduction of stock index futures," Standard Chartered's Chang said.

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