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Stocks see biggest fall in 10 years

By Hu Yuanyuan (China Daily)
Updated: 2007-02-28 09:46

The scale of the decline, however, surprised many.

He Jun, vice-president of Anbound Consultation Co, said: "Although the market index was at a high level and people were expecting a correction, what happened was astonishing."

The Shanghai index soared 130 percent last year.

He Jun said he had heard market rumors about a possible capital gains tax.

"This could have been a major trigger for such a plummet, promoting profit-taking funds to leave the market," he said.

But he believed the market would continue to be bullish this year.

Some analysts looked to the fundamentals to explain the unexpected fall yesterday.

Dong Chen, a senior analyst at CITIC China Securities, said: "Investors will unlikely be satisfied by the annual reports to be released by many listed companies. Their performance will provide no support for the high share prices."

Sources from Xiang Cai Securities said that the P/E ratio of the yuan-denominated A shares was double that of the world's average, indicating growing risks.

So yesterday's correction, Dong said, was "a good thing because it will pave the way for a healthy market in the long-run".

So long as China's macro-economic environment remains sound, investors still have a good chance to earn from the A-share market, analysts said.

Despite worries about too high share prices and management problems at large State-owned companies, analysts interviewed by China Daily all said the market stands a good chance this year.

Stephen Green, senior economist with the Global Research Division of Standard Chartered Bank, said the plunge has nothing to do with the overall economic situation.

"I don't think the drop is caused by the central bank's latest reserve ratio hike," he said.

The People's Bank of China, the central bank, required that commercial banks set aside 10 percent of their deposits starting February 25, up from 9.5 percent.

But Green said he sees at least one interest rate hike in the pipeline.

"You can lock some of the funds up in the banking system, but sooner or later if you want to control credit growth and investment, you simply have to make borrowing more expensive."

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