China: old style policy market meets new style risks

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Shanghai, Sep 27: Madame Wang, a retired factory worker and part-time stock investor, is not contemplating corporate earnings or economic trends as she watches a giant screen of stock quotes at a Shanghai brokerage. She's thinking politics.

"The 17th Party Congress is coming and the government won't let the market plunge before the meeting is over," she said at the crowded downtown trading hall of Galaxy Securities. Wang isn't the only Chinese investor betting that Beijing will keep the market stable ahead of China's most significant political gathering in five years, which begins on Oct. 15.

And the Communist Party Congress is just the latest example of how politics and policy are still primary factors that move Chinese stock prices.

But Beijing has been adjusting and easing its heavy hand in the markets, exposing investors to more of the risks seen in free-wheeling developed markets, even as it keeps tight control over such basics as the pace of new share listings.

"China's market will remain a 'policy market' in coming years as authorities use it to help fund-raising for state-owned firms, among other economic reforms," said Ren Chengde, senior stock analyst at Galaxy Securities.

"But an increasing number of investors also are turning to other factors, such as economic and corporate fundamentals, for hints of market trends. Regulators have also been trying to push investors to pay attention to these market factors." The volatility in the market over the past four months illustrates his point. Just after midnight on May 30, the Ministry of Finance announced a sudden tripling in the stock trading stamp tax to 0.3% to cool the market.

Officials feared a bubble was forming after the benchmark Shanghai index jumped more than 60 % in five months, while many investors were focusing, as they did in the 1990s, on loss-making third-tier stocks. The index plunged 21 % over the next five trading sessions, as investors worried that the government would embark on a campaign to depress share prices.

But the government largely took to the sidelines in the weeks that followed, and the index began to recover in mid-July as investors shifted their focus to several large firms' forecasts of strong first-half earnings.

The benchmark index has repeatedly hit record highs since late July, encouraged by improving earnings prospects, while many investors have shifted to less risky blue-chip stocks.