China stocks dive 4.3%, as biggest IPO nears

14:58, June 29, 2010

China's stocks took a dive on Tuesday as investors sold off shares unnerved by the planned biggest IPO of China Agricultural Bank early next month that is feared to drain up market funds.

And, Beijing policymakers' consistent efforts to clamp down on housing ills and pull down home prices are continuing to dampen property and bank stocks. Resource shares also tumbled as investors are worried about lower prices of energy, mineral and related sources.

The Shanghai composite stock index sank 108.65 points, or 4.29 percent to close at 2,426.63 points. It was the lowest closing in as long as 15 months. The Hong Kong stocks also dived nearly 500 points at 15: 00 pm local time.

Many uncertainties in Chinese economy including a possible slow-down of growth and tightening fiscal and monetary policies to rein in inflation are expected to lower horns for equity investors who have been enthusiastic about the world's fastest developing country.

Also, the hastening pace of Beijing policymakers to list a slew of firms on the domestic stock market has spooked investors, stoking fear that market liquidity would be drained up. Now, investors have begun to hear China's money-raising machine -- the so-called capital market, sputter under downpours of listings.

The financially repackaged Agricultural Bank of China (ABC), one of China's Big-Four state-owned lenders and also a laggard in bank profitability, will be traded on the stock market in early July. The largest IPO world over, reportedly to raise $23.2 billion, has sent the market shivers through the spine. The bank's announced share price, from 2.52 to 2.68 yuan for the Shanghai market, is not expected to attract vehemence of buying.

Initial signs from the market do not augur well for investors. The day the bank announced the price range for the bank's IPO on June 29, it caused a frenzy sell-off and the Shanghai composite stock index plummeted to below the psychologically important 2,5000 points -- it even sank to 2,430 at one point. Many investors dumped their holdings, worrying that a bottom is not in sight any time soon.

Although the country's economy made quite impressive strong comeback from the financial crisis in the first half of this year, it could run into strong headwinds in the second half, as the once-dominating economic backbone of real estate is deprived of firewood amid Beijing's resolute while steadfast campaign to cool off properties.

U.S.-style property boom and bust, which the world watched wearily from 2003-2009, is now Lesson No 1 for the boys steering China's economy. Now, though housing sells have withered resulting from Beijing's more strict credit policy and hiked mortgage rates for second and more homes, housing price has not gone down yet. The conventional wisdom is that the price would spiral down in July and August.

The global recovery is yet shrouded in mystery, which adds another uncertainty to China. During the just-concluded G-20 summit in Toronto, Canada, world leaders were careful not to draw too rosy a picture for this year and next, because no one is sure when the European sovereign debt woes will erupt again, or whether they are oblivious to any hidden economic perils that may prop up and strike us.

The equity investors worldwide are getting smeared by the suddenly dimmer prescription of U.S. economy given by the Federal Reserve in its last full-committee statement, and China's June 19 announcement to restart currency revaluation procedure, delayed by the sub-prime crisis and the Great Recession, has China's trade officials and dealers seriously worried about its export prospect -- still a key engine driving up China's growth.

In Beijing at the macro-policy drawing table, the central bankers are increasingly concerned with the month-on-month rise of inflations, which hiked to 3.1 percent in May exceeding government's annual target of 3 percent. Prominent economists, including Andy Xie and Qinghua University Professor Li Daokui, have recommended Beijing raise interest rates to control price rises.

At the same time, more economists have asked the government to wind down the extraordinarily proactive monetary policy, and take back big chunk of the mighty 9.59 trillion yuan of bank handouts last year. China's central bank planned 7.5 trillion yuan of new loans for 2010.

A slower growth of credit will be a drag on money supply and is expected to weigh heavily on the stock market. The Shanghai composite stock index has dived 27 percent this year, one of the worst performing markets in the world. It could get worse as the public cannot get any immediate relief from both inside and outside the country.

By People's Daily Online