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Chinese investors remain defiant

"The market will seek its own balance and correct itself ... The government should do nothing to interfere."

Yan Li, Chinalion Securities analyst

Experts in China and abroad warned this week of an imminent contraction in the Asian giant's roaring stock markets but defiant investors remain confident that the market knows best.

"The market will seek its own balance and correct itself," said Yan Li, an analyst with Chinalion Securities (華林證券) in Beijing.

"The government should do nothing to interfere," she said, adding that it was increasingly difficult for China's regulators to influence a market that has tripled in value to about US$1.6 trillion since 2005.

China's share markets again posted a series of record gains this week, with the key Shanghai index rising to 4,179.78 points on Friday for a rise of 3.71 percent on seven days earlier, its 10th consecutive weekly increase and up 57.3 percent since January.

And highly sensitive B-shares are up nearly 80 percent since January.

The once marginalized bourse, with a market capitalization merely 2 percent of the US$2.3-trillion-dollar A-share market, is seeing sharper rises now, but it may spearhead any future correction.

"That market can't just go up, but needs to correct," said Zhang Qi, an analyst with Haitong Securities (海通證券) based in Shanghai.

The week's broader market advance came despite warnings from former US central bank chief Alan Greenspan and the Organization of Economic Cooperation and Development that current prices are unsustainable.

China's stocks watchdog issued its second public warning within two weeks of alerting investors to market risk and only days after central bank measures to soak up the flood of liquidity failed to make a dent.

While the spate of cautionary remarks triggered a pull back on Thursday, investors were back in full-force on Friday as trade volumes on the A-share market neared record volumes of about US$42 billion.

Yan said that regulatory efforts to talk down the market are unlikely to be effective as the current momentum is so strong that any sign of interference risks making matters worse.

"When negative news is released investors may take it as sign they can buy into the market more cheaply. That's why we saw there was no impact on the market when the central bank increased interest rates," Yan said.

The nation's central bank hiked interest rates and bank reserve requirements as well as widening the currency's trading band a week ago on Friday but investors ignored the move.

Ratings agency Standard and Poor's said that China's regulators had no choice but to make gradual efforts to intervene.

"A heavy-handed approach, however, could have a significantly negative impact on the economy," Standard and Poor's credit analyst Tan Kim-eng (陳錦榮) said.

In February, China's markets showed just how sensitive they can be when prices in Shanghai tumbled nearly 9 percent, triggered by rumors of a possible capital gains tax on stocks, sparking turmoil in world equity markets.

With so many retail investors China's regulators worry that a repeat of the sudden downturn seen in February could leave inexperienced punters with nothing.

But Bian Fengwei, an analyst with Guodu Securities (國都證券) based in Shanghai, said China's market was more mature than critics suggest.

"Individual investors are not as at sea. Most of them know when to cash out and when to buy in. So really the market is developing on its own and will become healthier," he said.

With China's market capitalization only at about 65 percent of the country's GDP, compared to 80 to 90 percent in mature markets, Bian said that fresh capital will continue to flow in the weeks ahead.
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