China's stock market resumed trading yesterday under capital dilution pressure from floating of non-tradable shares. On the first day after the week-long Lunar New Year holiday, the market was tested by the floating of 1.16 billion shares previously non-tradable. As a result, the major index lost another 2.37 percent.

In this month and the next, a total of 16.22 billion non-tradable shares will become unfrozen. Yesterday saw the largest single-day volume with 1.16 billion shares. Calculated on the closing prices on February 5, the last trading day before the holiday, these shares of 38 listed companies were worth 16 billion yuan.

China Merchants Property Development had the largest number of unfrozen shares, with 30.9 million shares. Its shares closed at 61.33 yuan, 0.28 percent down from the previous close. In other words, the unfrozen shares from that company alone sopped up 1.9 billion yuan from the market. Shanghai Haixin Group ranked second in terms of the number of shares unfrozen yesterday. Their shares dropped 0.9 percent to 11.07 yuan. Zhejiang Shenghua Biok Biology, with the smallest amount, closed at 11.52 yuan, up 0.17 percent.

As a result of capital dilution from the share floating, the Shanghai Composite Index dropped another 108.98 points to 4,490.72. Opening lower from 4,525.03, it went through the trading session below the previous closing level, hitting a daily high at 4,547.54 and a low to 4,454.64. Of the A shares listed in Shanghai, 297 moved up, 63 ended flat while 490 closed down. Transaction value reached 61.5 billion yuan, one third lower than February 5.

The Shenzhen Component Index, tracking the smaller Shenzhen Stock Exchange, opened lower at 16,663.90, and closed even lower at 16,502.443, down 357.2 points or 2.12 percent from the previous close. Of the A shares, 209 climbed up, 73 fell and 399 saw little change in prices. Transaction value dropped to 26.8 billion yuan from the last trading day before the holiday.

Yesterday's fall is another full-scale plunge as almost all industrial indices were down except for the agriculture and forestry sector. PetroChina, the most heavyweight stock in the market, lost 3.2 yuan while index-driving banking giants were all down. GD Power Development, however, after a 10 to 10 share replacement and 1.2 yuan profit distribution each share announced on February 5, became the largest trader yesterday and saw its share price rocket over 5 percent against a depressive trend.

Since the start of this year, the Shanghai index has lost 14.7 percent and the Shenzhen index has dropped 6.8 percent in less than two months. By yesterday, 3.3 trillion yuan had evaporated from the stock market, a whole 10 percent lower from the end of last year.

Analysts attributed this round of stock price plunges to short-term discouraging factors, including a worldwide stock sale last week, China's tightening measures finally taking hold, and the prospective of capital dilution from share issues and unfreezing.

Last week all the world's major markets experienced severe drawbacks in light of worsening US economic prospects. After Citigroup and Merrill Lynch announced fourth-quarter losses from the subprime debt crisis, the fourth-quarter US gross domestic product statistics implied a spill-over from the credit crisis to other parts of the world's leading economy.

This Monday, Hong Kong's Hang Seng Index dropped 3.64 percent on its first trading day after the holiday. In the past 12 years, Hang Seng has never dropped on the day immediately following the holiday break. Fortunately, the world's major stock markets started recovering Tuesday.

China's most recent bank reserve ratio hike this year, the 11th since 2007, finally got investors' attention. Unlike the previous cases in which when a tightening signal was given out, the market reacted by leaping upward against regulator's intention, this time, the measures started to take effect. That is because the December loan, property and export statistics have all suggested slowed growth, analysts said.

In addition to Ping An's expected 160 billion yuan additional share and bond sales, China's stock market will also face severe pressure from the recent de-freezing of non-tradable shares. Estimated to be sopping up 518.9 billion yuan calculated using prices by February 5, these unfrozen stocks may keep the market from regaining higher positions for now, said analysts.

However, in the longer-run, things could be different. US president George W. Bush is expected to sign on an incentive package worth US$150 billion in a bid to stimulate the US economy through tax cuts to salary earners and corporate taxpayers. In addition, the weakening US dollar left less space for further interest rate raises for China, said experts, and that could be good for China's capital market.

(Chinadaily.com.cn February 14, 2008)