A cash shortage among banks made the Chinese market one of the world’s worst-performing markets last year and showed how tens of millions of small investors remain at the mercy of government policy.
In June and again last month, a liquidity squeeze sparked worries over China’s broader economy and hit the stock market, but the funding crunches were widely seen as engineered by authorities keen to impose tighter financial discipline over banks.
A tepid rebound in the world’s second-largest economy combined with worries that a resumption of new share offers would flood the market saw Shanghai’s benchmark stock index drop by an annual 6.75 percent yesterday, the final trading of the year.
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“Instability in the financial system and expectations that authorities would maintain a tight balance in its monetary policy led to some volatility in the market,” BOC International (Holdings) Ltd (中銀國際控股) analyst Shen Jun (沈鈞) said.
In comparison, the TAIEX rose 11.85 percent over the past 12 months, while Tokyo’s Nikkei 225 Index soared 56.7 percent in the past year and in New York, the broad-based S&P 500 had surged 29.1 percent by Monday after having tapped several record highs, while the CAC 40 in Paris gained 17.4 percent despite the French economy’s woes.
Even the Hang Seng Index in Hong Kong, which is highly exposed to the Chinese economy, rounded out the year up 2.86 percent.
Elsewhere in Asia, Sydney closed the year more than 15 percent higher and Wellington finished 16.49 percent stronger.
The People’s Bank of China has shown reluctance to inject extra liquidity into the interbank market as it fends off potential risks to the financial system and clamps down on shadow banking that resulted in excessive credit, analysts said.
The moves have caused spikes in the rates at which banks borrow from each other, with the effects spilling over to the stock market.
On June 24, the Shanghai Composite Index tumbled 5.3 percent — the biggest single-day decline since August 2009 — after the Chinese central bank initially shunned injecting liquidity before eventually relenting.
Similar worries also plagued the market last month, sending the Shanghai Index down 6.9 percent over a nine-day losing streak, until the central bank intervened to add funds.
The financial authority said yesterday that it would maintain an “appropriate” level of liquidity, while repeating its embrace of a “prudent” monetary policy, according to a statement about its fourth-quarter meeting.
“The stock market has always been sensitive to each and every move of policymakers,” Central China Securities Co (中原證券) analyst Zhang Gang (張剛) said.
Similarly, Chinese authorities hold the power to decide which firms can launch initial public offerings (IPOs) and when they go to market, in one example of the control the state retains over many parts of the economy.
China’s stock regulator suspended approvals for IPOs for more than one year to alleviate the pressure of an oversupply of shares and prepare for reforms to the listing system.
Yesterday, five companies announced that they had received permission to raise a combined 2.1 billion yuan (US$347 million), ending the lengthy freeze.
The China Securities Regulatory Commission has said it will give the market a bigger say in the listing mechanism, after Chinese Communist Party officials pledged at a key meeting in mid-November to let market forces play a more “decisive role” in the economy.
Yet some market participants are skeptical about reforms, saying the government is loath completely to surrender control and describing the IPO change as window dressing.
“It appeared to be a market-led reform but the substance still implies [government] administration,” said an analyst at a Shanghai brokerage, who declined to be named.
The regulator has announced that it will let investors assess the value and risks of IPOs, but stressed that it will retain “oversight” of stock offerings and information disclosure by companies.
The Shanghai broker said the new rules were “like throwing cold water on the market, dealing a heavy blow to those who had overly high expectations towards reforms.”
Weakness in the stock market came despite China’s domestic growth of 7.8 percent year-on-year in the third quarter of last year, snapping two quarters of slowing growth. Yet recent economic data has sparked worries that the rebound might not be sustainable.
Authorities have called for a structural adjustment in the economy, curbing traditional sectors such as resources and manufacturing and giving more support for emerging industries, but analysts say those plans have hit shares that are heavily weighted on the Shanghai Index.
“Looking ahead, the main board will likely drift with the macro-economy, with no drastic gains or declines,” Zhang said.
China’s stock market rose a mere 3.17 percent in 2012 and the weak returns have prompted local investors to seek alternative investment channels, in the face of a lack of choices since they are not allowed to invest directly overseas.
Instead, they have sought better returns in property, weakly regulated wealth management products offered by banks and even volatile virtual currency bitcoin.
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