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A strong market may not last long

By Bi Xiaoning (China Daily)
Updated: 2009-02-23 08:00

China's benchmark Shanghai Composite Index has gained over 20 percent this year, making it the best-performing stock gauge in the world. Just months earlier the index marked the end of 2008 by wrapping up its worst annual performance, falling more than 70 percent from a high of 6124 points in October 2007.

Related readings:  Chinese shares continue gains on stimulus plans  Chinese shares edge up on stimulus hopes  China stocks rebound a bit but turnover shrinks  China stocks surge 3% in massive turnover  China stocks surge 3.2% to five-month high

An online survey recently conducted by Sina.com showed investor confidence returning, with over 70 percent of respondents saying the market could rebound to over 2500 points.

Chen Dongqi, deputy director of the macroeconomic research center of National Development and Reform Commission, predicted this market rebound could reach 3410 points and that blue chips would perform well.

The expiry of the lock-up period for a large number of non-tradable shares smashed investor confidence in 2008. In 2009 there will be four times the number of unlocked non-tradable shares as in 2008, but analysts say there is no need for panic as State-sector companies hold a large proportion of these shares.

There could be 687.18 billion non-tradable shares changed to tradable ones in 2009. But State companies such as Bank of China, Industrial and Commercial Bank of China and China Petroleum & Chemical Corp hold 80 percent of these shares, according to Wind Info, a domestic financial data provider.

Analysts also said the adequate liquidity in January will help the market. According to the People's Bank of China, the central bank, Chinese banks extended a record 1.62 trillion yuan ($237 billion) in loans in January, a twofold year-on-year increase.

But many industry experts say strong loan expansion is not sustainable through the entire year.

Morgan Stanley estimates loan growth will peak in the coming months on the back of deteriorating economic fundamentals and will slow to 15 percent toward the end of the year.

"If loans were growing at a more reasonable level, it would ease investors' concerns about potential deterioration in banks' asset quality," said Wang Qing, Morgan Stanley Asia's chief analyst on the Chinese economy.

Deng Tishun, chief strategist at Goldman Sachs Asia, said the stock market rebound will not last because the profits of listed companies may drop 17 percent this year and China's macro economy needs at least three years to get out of its current downturn.

"China's A-share market may fluctuate for long periods this year, floating around 2000 points," said Deng.