China - Illegal To Borrow Money To Buy Stocks: Crackdown: "20% Correction Possible"

Discussion in 'Trading' started by ByLoSellHi, Feb 28, 2007.

  1. China's Stocks Decline as Rout Spreads; China Life Tumbles

    By Zhang Shidong

    Feb. 28 (Bloomberg) --
    China's shares traded in Hong Kong tumbled the most in nine months after a global rout added to concern that stocks were overvalued. China Life Insurance Co. and Bank of Communications Ltd. led declines.

    Stocks in Shanghai had the biggest plunge in a decade yesterday on concern a government crackdown on investments with borrowed money will end a rally that drove benchmarks to records.

    ``A 20 percent correction would not be surprising in such a market because it has been moving up at such a rapid pace,'' said Mark Mobius, who oversees $30 billion in emerging-market stocks at Templeton Asset Management Ltd.

    The Hang Seng China Enterprises Index, which tracks the so- called H shares of 37 mainland companies, slumped 5.1 percent in Hong Kong, set for its biggest decline since May 22. Overseas investors are restricted to owning $9.95 billion of mainland shares, or about 0.9 percent of the total market, while H shares have no restrictions.

    On the mainland, the Shanghai and Shenzhen 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, swung between gains and losses. The measure slid 0.3 percent to 2450.27 at the 11:30 a.m. local-time break. It earlier rose as much as 1.2 percent and fell as much as 1.8 percent.

    The Shanghai Composite Index added 0.3 percent to 2778.67, while the Shenzhen Composite Index was little changed at 709.83.

    The 300 index is valued at 38 times earnings, compared with 15 times for the Morgan Stanley Capital International Emerging Markets Index. The Dow Jones Industrial Average yesterday tumbled as much as 546 points, the most since the first trading day after the Sept. 11, 2001, terrorist attacks.

    `Risk Reduction Mode'

    China Life, the nation's biggest insurer, dropped HK$1.2, or 5.5 percent, to HK$20.45. China Construction Bank Corp., the nation's fourth-biggest lender, lost 21 cents, or 4.6 percent, to HK$4.32. Bank of Communications, the country's sixth largest, dropped 39 cents, or 4.8 percent, to HK$7.73.

    ``Overnight, the global emerging market as a whole was in a risk reduction mode,'' said Lei Wang, who helps manage $12 billion at Thornburg International Value Fund in Santa Fe, New Mexico. ``That continued in today's Hong Kong market.''

    China United Telecommunications Corp. advanced in Shanghai after the government said it won't impose a capital gains tax on stock investment, the Shanghai Securities News reported, citing unidentified officials at the finance ministry and tax bureau.

    Stocks fell yesterday after the State Council, China's highest ruling body, approved a special task force to clamp down on illegal activities in the market. Investors were concerned the Chinese government would impose further measures as the National People's Congress, China's legislature, meets next week.

    United Telecom, Shanghai Auto

    Banks in China are banned from lending money for stock investments. The regulator last month ordered banks to examine personal loans to prevent them being used to buy shares. The central bank carried out similar crackdowns on unauthorized margin trading in 1997 and 2001 after indexes surged.

    China's slide yesterday wiped out $107.8 billion from a stock market that doubled in the past year.

    ``The market will probably test lower before it rebounds today as we don't see any negative news emerging,'' said Yan Ji, an investment manager at HSBC Jintrust Fund Management Co. in Shanghai.

    China United Telecommunications, which controls the nation's second-largest cell phone operator, rose 0.25 yuan, or 5.1 percent, to 5.14. The shares plunged by the 10 percent daily limit yesterday. Shanghai Automotive Co., the listed unit of China's largest automaker, gained 0.66 yuan, or 5.5 percent, to 12.65. The shares have surged 54 percent this year.

    Xugong Science & Technology Co., a manufacturer of construction machinery in the eastern province of Jiangsu, plunged by 10 percent daily limit to 12.99 yuan. The shares have doubled this year.