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Equities decline on policy change woes

 

Property shares led declines yesterday as the Shanghai municipal government tightened tax and mortgage rules.[China Daily]
China’s stocks fell on the first trading day of the year as Shanghai tightened tax and mortgage rules, bolstering prospects the government will step up measures to curb property speculation.
The Shanghai Composite Index fell 33.38, or 1.02 percent, to close at 3243.76, snapping a four-day rally. The gauge surged 80 percent last year after government spending and bank lending helped revive growth in the world’s third-largest economy.
The CSI 300 Index dropped 1.13 percent to 3535.23.
“There’s uncertainty over the government’s policy on the property industry,” said Zhao Zifeng, who helps oversee about $10.2 billion at China International Fund Management Co in Shanghai.
“For the broader market, the situation is bright as listed companies are expected to achieve growth for a second straight year amid the economic recovery.”
Poly Real Estate fell 2.2 percent to 21.9 yuan ($3.21). China Vanke Co, the nation’s biggest listed property developer, lost 1.9 percent to 10.6 yuan. Gemdale Corp, the fourth largest, retreated 2.7 percent to 13.51 yuan.
Home buyers must prove they are first-time purchasers before they can benefit from a reduced tax on property transactions, the Shanghai municipal government said in a statement on its website on Dec 31.
Separately, Guangzhou’s government announced tougher penalties for developers hoarding land, the South China Morning Post said yesterday.
“These policy changes will likely raise the transaction and funding costs of most speculative transactions,” Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong, said in a note. “Other major cities such as Beijing, Guangzhou, Shenzhen and Hangzhou will likely follow suit.”
SAIC Motor Corp led gains by automakers after the nation’s manufacturing expanded by the most in five years in December. SAIC gained 3.2 percent to 26.96 yuan.
Chongqing Chang’an Automobile Co, the Chinese partner of Ford Motor Co and Mazda Motor Corp, climbed 3.4 percent to 14.5 yuan.
A purchasing managers’ index rose to a seasonally adjusted 56.1, HSBC Holdings Plc and Markit Economics said yesterday. The measure is based on a survey of more than 400 manufacturing companies.
The PMI number was the highest since April 2004, the first month of the HSBC survey. The official PMI, which was released on Jan 1 and has a different methodology, showed the biggest expansion in 20 months.
“We remain optimistic in 2010,” said Sun Chao, an analyst at CITIC Securities Co in Shanghai. “We continue to see improvement in the economic front and that will be reflected in corporate earnings.”
Hang Seng dips
Hong Kong shares closed down 0.23 percent yesterday, its first trading day for 2010, as mainland banks fell on worries over fund-raising plans and policy changes.
The benchmark Hang Seng Index ended down 49.22 points at 21823.28. The China Enterprises Index of top locally listed mainland stocks fell 0.34 percent to 12750.55.
The mainland’s top lender Industrial and Commercial Bank of China fell 1.09 percent to HK$6.37 (82 cents). China Construction Bank lost 1.2 percent to HK$6.59.

Index futures likely to debut in March

Equities rose yesterday following reports that the regulator would introduce futures contracts on the country’s stock indexes as early as March, with securities firms recording sharp gains.
The benchmark Shanghai Composite Index rose 1.2 percent to close at 3,282.18. CITIC Securities gained 4.9 percent to 32.82 yuan while Everbright Securities hit the 10-percent daily trading limit to 27.24 yuan.
Sources close to the securities regulator told China Daily yesterday that the new financial mechanism is ready to be launched, but did not give an exact date.
Stock index futures are agreements to buy or sell an index at a preset value on an agreed date.
Bloomberg reported yesterday that the State Council has given the China Securities Regulatory Commission approval “in principle” to introduce index futures and the first contract, based on China’s CSI 300 Index, may begin trading after the annual National People’s Congress in March.
The new instrument would allow Chinese investors to profit from declines in share prices and hedge risks for the first time. It will also help curb volatility in a market that slumped nearly 65 percent in 2008 and rebounded over 80 percent last year.
Analysts said while the new mechanism would trigger a bull rally in blue-chips and heavyweight shares, it could also lead to a possible correction.
“Blue chips usually lead the gains prior to the launch of the index futures as they are the most sought-after stocks by institutional investors,” said Liao Qing, an analyst with Sealand Securities.

“But once the mechanism is in place, the market is likely to see a correction as investors would face pressures to sell,” he said.
It is expected that margin trading and short selling would also be launched soon as part of the preparations for introducing index futures.
But Liao said it would be feasible to have index futures first as market rules and conditions are already ripe and the introduction of margin trading and short selling can wait till more detailed regulations are announced.
“Details of margin trading and short selling are still not clear and the business is much more complicated than index futures as it involves each individual stock and securities firm,” he said.
Analysts feel that the new financial mechanism may not be open to qualified foreign institutional investors for now as the regulator intends to protect the interests of domestic investors first.

Deutsche Bank: Stock rally likely to fade this year

A rally by China’s stocks may fade from the second quarter as inflation triggers “significant policy tightening” by the government and the US economy weakens, Deutsche Bank AG said.
The MSCI China Index may still end the year 15 percent higher, Ma Jun, Deutsche Bank’s Hong Kong-based China economist, said in a note to clients. The index tracking mostly mainland companies traded in Hong Kong jumped 59 percent last year after losing 52 percent in 2008.
“We see upside potential to the indices in the first few months, as the macro environment should remain favorable,” Ma said. “CPI and asset inflation will likely pose major macro challenges and the resulting policy responses will cause market risks,” he wrote, referring to the consumer price index.
Deutsche Bank joins Morgan Stanley in predicting an end to China’s rally in 2010 as inflation accelerates and the government withdraws some stimulus. Morgan Stanley analysts led by Jerry Lou said on Dec 15 they expect a “boom and bust” by the nation’s equities this year as gains in the first half stall.
A record 9.2 trillion yuan ($1.3 trillion) of loans in the first 11 months of this year has added to the risk of asset bubbles and resurgent inflation. The nation’s consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of deflation.
‘Bubble’ concern
Accelerating inflation may inflate a “full-blown” bubble in China’s stock and property markets this year, BofA Merrill Lynch Research’s China strategist David Cui said on Dec 28. Investors may divert savings into equities and housing as the pace of inflation outstrips interest on bank accounts, Cui said.
Premier Wen Jiabao pledged on Dec 27 to tackle “excessive” property-price gains in some cities after prices across 70 cities rose at the fastest pace in 16 months in November.
The government said yesterday it would restrict credit for purchases of second homes to curb speculative housing investments, as well as crack down on property hoarding by developers.
Deutsche Bank’s Ma said deceleration of year-on-year growth and a second dip in the US will also “negatively affect” Chinese stocks from the second quarter.
Nobel Prize-winning economist Paul Krugman said this week he sees about a one-third chance the US economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.
Ma recommended investors buy insurers, as well as consumer and agriculture companies on rising prices, and avoid refining and power companies.
His top stock picks include Ping An Insurance (Group) Co, China’s second-biggest insurer, New World Department Store China, which operates upscale department stores in China, and Texwinca Holdings Ltd, a producer of knitted fabric.
Deutsche Bank expects China’s economic growth to accelerate to 9 percent in 2010 from 8.4 percent last year, Ma said.