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Chinese stocks gallop in 2007, analysts look at 2008

This year, the world discovered the Chinese stock market.

Investors in China poured their money into shares like never before, sending the market on a turbulent, stunning, record-breaking ride.

And around the world, people took notice: In February, for the first time ever, a plunge in Chinese stocks triggered a global market sell-off, suggesting the potential sway this heretofore ignored market will have in years to come.

China's market quickly recovered and the Shanghai Composite index went on to soar 97 percent this year, making it the world's best-performing major benchmark index.

But the year ahead isn't going to be as rewarding, analysts say, and the volatility will likely continue.

"It was a nice rally," UBS economist Jonathan Anderson wrote in a recent report. The market in the new year "may not be nearly as exciting."

While many Chinese believe that authorities will try to keep the markets on an even keel ahead of the Beijing Olympics in August, other risks loom.

Beijing is struggling to keep inflation in check and could continue to raise interest rates. Also, the mortgage crisis in the US has raised the risk of a recession that might sap demand for Chinese exports.

Jason Zhou, 37, is among the legions of Chinese stock investors who were chastened by the market's roller-coaster performance this year.

Zhou, who works for a foreign trade company in Shanghai, bought shares in oil and gas giant PetroChina (中國石油) just after it listed shares on the Shanghai Stock Exchange last month at 43 yuan (US$5.90).

Normally, elite state-controlled companies such as this have seen huge, sustained gains after initial public offerings (IPO) on domestic bourses.

But PetroChina, whose market value, according to some methods of calculation briefly surpassed US$1 trillion after its local market debut, has fallen back to just above 30 yuan (US$4.10) per share.

Zhou cut his losses and sold when the shares fell to 38 yuan (about US$5.20).

"The loss is not huge, but it's impressive enough," Zhou says. "This was not a pleasant experience."

Neither was the 8.8 percent plunge in the Shanghai index on Feb. 27, which spooked investors around the world and was one of several gut-wrenching drops this year.

In another sign of China's growing market muscle, Shanghai became the second most popular place for IPOs behind New York as companies raised US$48.62 billion through last month, World Federation of Exchanges numbers show.

That surpassed the US$31.81 billion raised in IPOs in Hong Kong and the US$43.47 billion chalked up in London during the 11-month period, the federation's numbers show. Only the New York Stock Exchange, with US$52.06 billion, had more.

However, despite the rising prominence of China's two main stock markets in Shanghai and Shenzhen, they still severely restrict foreign participation and are largely walled-off from the rest of the world.

Overseas companies are barred from listing on them and foreign individual investors can only buy limited quantities of yuan-denominated "A shares" through designated "qualified foreign institutional investors. [QFII]" Those so-called QFII purchases are capped at US$10 billion, though that ceiling is due to triple soon.

China's markets still exist mostly to raise money for state companies -- the reason they were set up in the early 1990s.

In the year just passed, PetroChina, coal miner China Shenhua Energy Co (神華能源) and China Construction Bank Corp (中國建設銀行). heeded the government's call to return to local capital markets to raise funds and improve the quality of listed companies.

Among the IPOs coming up next: China Mobile (中國移動通信), the country's largest mobile service provider, which plans to raise US$10 billion or more in a listing in coming months.

Reforms aimed at combating rampant price manipulation, improving shareholding arrangements and strengthening corporate disclosure requirements helped restore investor confidence after years of devastating scandals kept share prices mired in multi-year lows.

But as far as Zhou is concerned, they haven't gone far enough.

"Listed companies in China seem to have more freedom than elsewhere to choose what they want or don't want to disclose," he said. "That's so unfair to investors, especially our individual investors."

Still, many analysts and investors remain bullish about China, given its booming growth. The economy is forecast to grow close to 11 percent next year once again, despite efforts to curb investment and cool inflation.

"Don't be too panicked about the experience with PetroChina," says Chen Huiqin (陳惠琴), an analyst at Nanjing-based Huatai Securities (華泰證券). "The IPOs of big state-owned companies are still full of potential."

The market has slumped after regulators, fearing that prices were rising too quickly, suspended sales of mutual funds to new subscribers. That ban ended late this month.
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