Correction is likely to be the main theme in the domestic stock market this week amid a host of concerns, including high valuations of stocks, analysts said.

 

They expect the market to be under downside pressure after the central government announced over the weekend a rise in the bank reserve ratio later this month.

 

The Shanghai Composite Index tumbled eight percent to end last week at 5,315.54, marking the biggest weekly drop in nine years. Investors sold shares heavily to channel funds to new shares and also on fears of more government tightening measures. The key index had soared almost 130 percent between the beginning of the year and a record intraday high of 6,124 in mid-October amid a bull run.

 

"High valuations are the main hurdle to prevent the market from strengthening," said United Securities analyst Wang Hui. "The stellar performances of some blue chips, which listed over the past months, have been inflating the market bubble."

 

Oil giant PetroChina Co more than doubled on its Shanghai debut on November 5, becoming the world's largest listed firm by market capitalization. But its shares soon encountered profit taking on valuation concerns. This cast a shadow over the overall market, although PetroChina wouldn't be included in the benchmark until November 19.

 

"Compared to the previous occasions, the correction this time could be longer and the degree could be bigger, as the index had jumped too high," said Chen Jian, an analyst at Galaxy Securities. "During this correction, the lowest the index could go to is around 4,800, based on our technical analysis."

 

The People's Bank of China, the central bank, announced on Saturday it would raise the reserve ratio for lenders to a record level on November 26, the ninth increase this year, which could curb a cash flow into the financial market.

 

The central bank has raised the ratio once a month, except in March and July, this year. The Shanghai benchmark, however, rose in the first trading session following the announcement every time except the one in September, as investors digested such a negative move, which typically falls within expectations.

 

But some investors fear the reserve ratio rise could help cause the market to decline this time.

 

"Even so, this could not be the last straw," Pi Haizhou, an independent financial analyst, wrote in an online commentary. "To dampen the stock market is not the regulator's ultimate aim. We have almost completed the return of H shares of major state-owned firms to the mainland (market), but there's still a long way to go for red chips. So the task is not quite complete, and a bull market is necessary to the task for the stock market is far from completion, and all these need the support of a bull market."

 

Red chips refer to Chinese mainland companies listed and registered in Hong Kong, including big names like CNOOC and China Mobile. The mainland is working on a return of these shares as under current rules, only locally-incorporated firms can trade on domestic markets.

 

(Shanghai Daily November 12, 2007)