One-Two Punch to China Shares
Shanghai Composite Index, Chinese equities, Chinese ADR Index, Stock-Index Futures Market, Chinese stocks, CSI 300 Index, China Stock Digest, China Stock, Chinese stock, Chinese A-share markets, Shanghai Composite, Hang Seng China Enterprises Index
A weekend clampdown by China's Cabinet, the State Council, has delivered a one-two punch to China shares.
The Shanghai stock market posted its biggest daily decline in almost eight months in Monday's trading, falling almost 5 percent to below 3,000 points. That retreat was led by property shares which plummeted after the State Council, announced stricter rules for housing purchases. With real estate prices having soared in China this year, amid widespread talk of a housing bubble, Beijing's moves rattled a market that had already been shaken by the introduction of China's first Stock-Index Futures market last week. On Saturday the State Council ordered banks to suspend loans to borrowers with two or more houses as well as restricting lending to buyers who can't provide tax certificates or proof of social security contributions. The moves also give local governments power to limit the number of property purchases an individual can make within a certain period. There have been several previous clampdowns on housing speculators but this is the toughest yet, and it clearly rattled nerves on the Shanghai and Shenzhen stock markets. With the Shanghai Composite Index slumping 4.79 percent, or 150 points, to close at 2,980.30, the benchmark index has tumbled below the psychologically important 3000 mark. The new stock-index futures also plummeted with the May futures contract on the CSI 300 Index falling 6.81 percent to 3,197 points.
The clampdown also reflected concerns about banking tighter liquidity and a possible shift in macroeconomic policies by Beijing. Some traders are interpreting the move as a signal that stimulus measures are finally being wound down. Similar concerns brought about a one-day drop of less than two percent in the China ADR Index. Is it a panic, or the bursting of a bubble? The numbers indicate that this is not the end of the world for Chinese investors. Many real estate stocks in Shanghai fell by their ten percent daily maximum. But importantly other real estate-related stocks did not. Bank of Communications sank 6.36 percent, China Merchants Bank retreated 6.37 percent and Shanghai Pudong Development Bank slumped 6.80 percent. But it was definitely not the kind of rout the preceded the bursting of the U.S. mortgage bubble. Beijing has been steadily tightening rules for second-home ownership in an escalating campaign to drive out speculators and ease a potential bubble. Investors who are nervous about a U.S. style real estate implosion should reflect on the fact that Washington did absolutely nothing to rein in an out-of-control mortgage and banking industry, despite repeated warnings, until institutions like Bear Stearns and Lehman Brothers imploded. No doubt, Beijing's clampdown will take the steam out of Chinese markets in the coming week or two. But investors should note that concerns about real estate speculation are the only major worries to date about the Chinese economy. GDP continues to expand at an annualized rate of almost 12 percent. World trade is coming into greater balance. Inflation remains below three percent. And, this cannot be emphasized enough, Beijing is taking concerted action in an arena where Washington failed utterly to act. The futures market by be down but it still anticipates gains for the Shanghai Composite Index next month. This is a sharp drop but it is not the end of the Chinese economic miracle. If anything, it is a sign of Beijing's determination to avoid the fate of the U.S.Disclosure: