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Share market needs correction

By Zhang Jin (China Daily)
Updated: 2007-02-28 16:27

China shares had a rollercoaster ride in the first two days of the Year of the Pig.

Following Monday's rally that broke the significant barrier of 3,000, shares nosedived 268 points yesterday.

Yet in the long term, a correction could only be good for the exchange. To ensure sustained growth, the market needs a drop as deep as 400 points, as it has been overheating for some time.

It took the benchmark Shanghai Composite Index seven months to grow from 1,500 to 2,000 points, yet just three months to reach 3,000. During the same period, Hong Kong shares rose 30 percent and the New York exchange jumped 15 percent.

Shanghai shares look to be overpriced in terms of price-to-earnings ratios (P/E), an important indicator that measures whether a stock is expensive.

The average P/E in Shanghai now exceeds 38, more than double that of Hong Kong's 15.

The Hong Kong exchange experienced stock woes from 2001 to 2003, when its P/E reached 30.

And a glance at the index charts from Shanghai, New York and Hong Kong shows a big difference among the three upward curves. Shanghai's is roughly straight with very few dips, while the other two are coupled with many falls, sometimes sharp ones.

From a technical point of view, shares usually take a big dip before they rebound to fresh peaks. Hong Kong shares declined to 15,200 from 17,200 in June before the exchange mustered enough momentum to break 20,000 in December.

By contrast, the continuously rising Shanghai exchange has been on a precarious bull run that could lead to a market full of bubbles.