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May 18, 2010

May 18, 2010
Chinese Stocks Retreat Abruptly From 2009 Gains
By DAVID BARBOZA
SHANGHAI — After a spectacular rise last year, China’s stock market has plummeted on growing concerns about Europe’s debt crisis and expectations that Beijing is about to take strong action to slow the nation’s booming economy and prevent it from overheating, analysts say.

Investors are worried that Chinese exports to Europe will slow in the coming months and that government efforts to tame this country’s economy by tightening credit will hamper a wide array of industries, including the nation’s fast-growing real estate market.

Although share prices in Shanghai rose modestly Tuesday after falling 5 percent Monday, the Shanghai Composite Index remains near its lowest level in a year, down about 21 percent this year.

Stock prices have also fallen sharply over the last few months in Hong Kong and Shenzhen, largely because Beijing is expected to raise interest rates and tighten bank lending to help rein in inflation and soaring property prices.

In Hong Kong, the Hang Seng Index is down about 9 percent this year.

China’s economy has been red hot since late 2009, when Beijing’s huge economic stimulus package began to kick in along with record lending by state-owned banks. In the first quarter of this year, China said its economy grew 11.9 percent.

The aggressive lending helped revive China’s building boom and sent Chinese stock prices soaring. Last year, the Shanghai Composite rose about 80 percent, making it the world’s best performing major stock market.

But now, with mixed signals about the prospects of a solid global recovery by the end of this year, analysts say Chinese investors have grown cautious.

“This doesn’t really reflect what’s happening in the economy now, but it reflects what investors think will happen in the future,” said Zhao Xinge, an associate professor of finance at the China Europe International Business School in Shanghai. “The new policies could cool the real estate market. And the real estate market plays a major role in the economy — not just steel and construction companies, even home appliances.”

Although China’s economy is still roaring, many economists expect growth to slow modestly in the latter part of this year, partly because of tighter monetary policies. And some warn of potentially bigger trouble ahead, particularly if exports to the United States and Europe — China’s two biggest markets — are weak, and government stimulus money dries up.

Perhaps in anticipation, some investors are already pulling back from the stock market.

“This was a cash-driven rally, and now liquidity’s being driven down a bit,” said Stephen Green, a Shanghai-based economist at the Standard Chartered Bank.

Henry Cao, a professor of finance at the Cheung Kong Graduate School of Business, says some Chinese investors are already looking to invest overseas.

“They’re hoping returns there might be better,” Professor Cao said.

But other analysts caution that the Shanghai and Shenzhen stock markets are known for attracting speculators and, unlike the more stable Hang Seng index, are prone to volatile price swings.

In late 2007, the Shanghai Composite soared as high as 6,036 before collapsing in 2008 and falling to about 1,717. Only late in 2009 did it start sprinting forward again. The Shenzhen index is down about 17 percent this year.

And yet, there is often a sense of optimism among investors in China, particularly in Shanghai, that any slowdown is just a breather before the next great stock rally.

That was evident Saturday, when this city unveiled a huge bronze sculpture of a charging bull and placed it in the Bund financial square. The sculpture is a replica of the one located in New York, on Wall Street. Both were produced by the Italian-American artist, Arturo di Modica.

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