Listed companies' poor performance and the government's tightening monetary policy will slow China's soaring stock market in the second half of this year.

 

A poll of five stock analysts shows that the market is not likely to enjoy the broad buoyancy it did in the first six months of 2006.

 

A CITIC Securities' recent research reveals a much closer connection between the excessive money supply and the boost to the stock market this year.

 

"Excessive money has flown into the market in various ways, and the ample capital supply has pushed the stock market up over the past months. It was especially obvious after March." Cheng Weiqing, an analyst with the securities firm, said.

 

Based on the trends, the analyst believes the market will experience a temporary retreat in short-term capital inflows in the second half of this year, as the government is to take further steps to curb excessive money supply.

 

The central bank has already taken measures to tighten the excessive money liquidity, with April's interest rate increase and July's reserve ratio hike.

 

But statistics show that money supply still grew in June, a sign the central bank may soon take further steps to mop up the excessive liquidity in the market, said analysts, as the high growth of forex reserves is unlikely to fall.

 

And as part of their latest round of policy tightening, the authorities are paying increased attention to capital flow to the property and capital markets.

 

Cheng believes the central bank and the China Banking Regulatory Commission will take tough measures to control loans growth, and stem capital flow into the property and capital markets.

 

Whereas excessive money supply is not exclusive to China, the growing concern over excessive liquidity internationally is likely to push a worldwide cycle of central bank rate hikes, which will in turn affect the flow of global liquidity to emerging markets, including China's stock market.

 

However, excessive money flowing into the capital market will only have a short-term effect. Fundamental factors including listed companies' profit-gaining abilities, the effect of stock reforms, mergers and acquisitions, and restructuring also play key roles in the stock market.

 

Listed domestic companies' pre interim reports showed that up untill July 7, 170 companies out of 390 reported losses in the first half year, accounting for 43.58 percent. Another 46 companies reported a reduction of their profit in the first six months.

 

"Actually, listed companies' profits have fallen since 2004, with net profit witnessing a fall. Net profit in the first quarter of 2006 was down 16 percent compared with the same period of last year." the CITIC Securities report said.

 

It said poor performances among listed companies would certainly not support the increase of index.

 

"I do not think their performance will undergo an obvious improvement over the next six months. From this aspect, the index will not rise much either," said Zhang Qi, an analyst with Shanghai-based Haitong Securities. "The market will face pressure from further initial public offerings and other capital raising activities."

 

Large companies like the Industrial and Commercial Bank of China are expected to issue A shares and H shares simultaneously within the year, probably in September.

 

Others including Air China and China Mobile, listed overseas, are claimed to be preparing to return to the home market.

 

Though a schedule is not decided yet, the fact that these blue-chips firms will potentially siphon large amounts of capital will certainly have a psychological impact on most investors.

 

Zhang believes the fact many institutional investors have gained from the first round of index hikes will make them pause before making further moves.

 

"But there will still be some highlights in the second half of this year," said Zhang, adding that more and more restructuring, mergers and acquisitions among listed companies will boost their value.

 

(China Daily July 21, 2006)