Chinese Stocks Rebound After Drop

June 5, 2007
Chinese Stocks Rebound After Drop
By KEITH BRADSHER
New York Times

HONG KONG, June 5 ?- Share prices in China plunged another 7 percent this morning, only to turn around in the afternoon to finish with gains after the government authorized four large funds to raise money for the purchase of stocks.

The remarkable volatility of Chinese markets underlined again the extent to which stock market investors continue to look to the government for cues on when to buy and when to sell.

Many experts have warned this dependence on the government could make investors especially angry at Beijing officials if the market were to suffer a deep and prolonged drop.

The Shanghai A share market ended the day with a gain of 2.58 percent, while the Shenzhen A share market gained 2.34 percent.

The turnaround in the Chinese stock market in afternoon trading seemed to occur in the nick of time for other Asian stock markets.

After largely ignoring the Chinese stock market's troubles through Monday, stock markets began to dip this morning in Hong Kong, South Korea, Thailand, Malaysia, Singapore, Indonesia and India.

The losses were modest in each case, however. A broad measure of Thailand's market showed the heaviest loss, down 1 percent by the early afternoon. In Japan, the Nikkei index bucked the trend and eked out a gain of 0.31 percent by early afternoon.

The Chinese government authorized the creation of four funds that will be allowed to raise up to $1.3 billion each from investors for the purchase of stocks, the official China Daily newspaper reported on its Web site today. Other state-controlled newspapers also published articles suggesting that investors focus on potential long-term gains.

By the end of the day, with the Chinese market rising again, most Asian markets were posting gains. Share prices climbed 0.54 percent for the day in Hong Kong, while the Nikkei 225 index rose 0.45 percent in Tokyo.

Investor reaction outside China to the sharp drop and considerable volatility of Chinese shares since last Wednesday ?- when the government tripled its tax on share transactions ?- has been fairly muted.

This is in contrast to the declines in markets around the world when Chinese shares suddenly fell 9 percent on Feb. 27.

Jing Ulrich, the chairwoman of China equities at J.P. Morgan, said that the difference was that the Japanese yen was strengthening in late February, so investors were already looking then for holdings to sell so that they could repay money they had borrowed in yen.

For the past week, however, the yen has been fairly weak, so investors have been less eager to sell their assets in response to the Chinese market's difficulties, Ms. Ulrich said.

The Chinese government is also likely to prevent stocks from falling too far because that could risk antagonizing many citizens already upset by the steep rise in the price of pork and other meats this year, she added.

Most economists and market analysts continue to maintain that the drop in China's stock market is unlikely to affect the powerful Chinese economy.

If the Chinese economy stays strong and continues to take in a lot of imports from its Asian neighbors then these neighbors' economies could also prove resilient.

Qu Hongbin, an economist at HSBC, wrote in a research note today that China's economic growth depends mainly on fixed asset investment, and Chinese companies only depend on the stock market for 6 percent of the outside money they raise to pay for these investments.

Many Chinese companies are so profitable, moreover, that they barely need outside financing and can make investments with the cash they generate from current operations.

The sharp rise in the Chinese stock market this spring also seems to have done little to stimulate consumer spending by families with gains on their share holdings, so a reversal of the market should not be much of a drag on consumer spending, Mr. Qu said.