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Title: Shanghai Index Dives 8.8%
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Published: Feb 27, 2007
Author: IBD
Post Date: 2007-02-27 20:57:03 by tom007
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Views: 29
Shanghai Index Dives 8.8% BY KIRK SHINKLE INVESTOR'S BUSINESS DAILY Posted 2/27/2007 The worst sell-off in a decade for Chinese stocks spilled across world markets Tuesday. The Shanghai composite index fell 8.8%, its worst one-day loss since 1997. The selling quickly spread across Asia, Europe and finally the U.S., where major averages suffered their worst one-day percentage losses in about four years. Fearful investors pushed the 10-year Treasury yield down 12 basis points to 4.51% and dumped dollars. Chinese stocks had been enjoying record gains since late 2006, prompting talk of the latest bubble in one of the world's fastest-growing economies. The Shanghai market has more than doubled in the past year. "There's clearly been a real mania in the Chinese domestic markets very much akin to Nasdaq in 1999 and early 2000. (It's) straight up gambling. People clearly couldn't put enough money in the markets," said Donald Straszheim, a longtime China watcher and vice chairman at Roth Capital Partners. Chinese ADRs Tumbled Shares of Chinese firms listed on U.S. markets plummeted. China Mobile (CHL) dived 10%. Mindray Medical, (MR) which had doubled from its September IPO, crashed 41% early before closing down 13%. Focus Media, (FMCN) which reported fourth-quarter results after Monday's close, held on for much of Tuesday. But the Chinese flat-panel advertising firm capitulated late, dropping nearly 6%. Metal miners and producers, which have rallied on high prices driven in large part by Chinese demand, were among the biggest losers on U.S. markets Tuesday. Rumors of further regulation of Chinese financial markets may have spooked some investors. Big Reverse After Big Run But other than the recent run-up, analysts offered few concrete reasons for Tuesday's selling. Most simply cited a market that had gone too far and too fast without a meaningful break. "You have a market that is generally very speculative that experienced very rapid gains . . . that was suddenly subject to correction with a very small catalyst," said Jim Oberweis, president of Oberweis Asset Management. Interest in Chinese shares began to pick up in late 2005 when state-owned firms — still the biggest majority of China-listed companies — were allowed to issue more shares to the public. Since then, the combined Shanghai and Shenzhen markets have grown to a combined market cap near $1 trillion. While still small compared with more mature equity markets in Europe and the U.S., China now punches above its weight, given its rising importance as an engine of world economic growth. Analysts downplayed the possibility that China's stock crash on Tuesday will derail what continues to be one of the biggest economic expansions in history. Several referred to the drop as a financial event, not an economic one. "To me, this is kind of like October '87 here in the States. It did not contaminate the U.S. economy at that time, and I don't believe the sell-off in China is going to crater China's economy, ours, or any other," Straszheim said. Not that shades of "Black Monday" are any reason to cheer. Chinese stocks are expected to be even more volatile down the road. Unlike more established markets, the vast majority of its shares are held mostly by retail investors rather than institutions. While the huge drop in equities will undoubtedly cause concern for traders in days to come, the red-hot Chinese economy is still expected to grow around 10% for a fifth straight year. Inflation is low, only recently budging above 2%. It has provided a solid base for Chinese growth, but also has sent speculation of all types surging. Despite attempts by the government to cool growth by tightening lending standards, curbing investment and reining in the money supply, growth appears to be continuing unabated. "We know there are bubbles in various markets. In that sense, one shouldn't be really surprised. The main structural problem is overinvestment in China," said Todd Lee, managing director of Global Insight's China group. While an immediate reaction to control market action by officials in Beijing is less likely due to more reform-minded party members, a troubled stock market could boost pressure to slow future reforms.
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