December 10, 2014 2:08 am JST
Shanghai stocks plunge

Sell-off taken in stride, but more bumps may lie ahead

HISATSUGU NAGAO, NQN staff writer

HONG KONG -- The Shanghai Composite Index tumbled 5.4% to 2,856 Tuesday after climbing to its highest level in more than three and a half years the previous session.

     The sell-off came as no surprise to many, given the buildup of investors looking to take some money off the table after a heady winning streak.

     While some fear shares are still overvalued, many expect renewed gains to come. The market looks to have more turbulent sessions in store amid unprecedentedly high volume.

On a tear

As of Monday's year-to-date closing high, the index was up 42% for the year. But nearly half of this advance was made in just 11 sessions after the People's Bank of China cut interest rates on Nov. 21. During that period, the index rallied 21%.

     Yet the Shanghai-Hong Kong Stock Connect program, an interexchange link heralded as a "through train" for foreign investors into mainland China's biggest equity market, is now being called a "ghost train." Shanghai-bound investment reached its daily limit only on the day the link opened last month and has fallen woefully short since.

     Nor is China's real economy looking hot enough to ignite a stock rally. The official Purchasing Managers' Index fell to 50.3 in November from 50.8 in October, edging closer to the boom-bust line of 50. November imports and exports were both weak, according to data reported Monday. Other key macroeconomic indicators for November due out in the coming days are also expected to disappoint.

When bad news is good

But such dismal readings will provide impetus for the PBOC to cut its reserve requirement ratios for commercial lenders, says Shen Jianguang, chief economist at Mizuho Securities Asia. The driving force behind Shanghai stocks recently has been none other than expectations for additional monetary easing.

     As bullish and bearish views clash, stock trading has been fast and furious. Turnover has swelled to more than double the level seen before last month's interest rate cut in back-to-back sessions, reaching an all-time high of 793.3 billion yuan ($128 billion) on Tuesday -- more than six times that day's activity on the Tokyo Stock Exchange's first section.

     Shanghai stocks have entered a correction, the length of which will depend on policymaking, says Sam Le Cornu, senior portfolio manager at Macquarie Investment Management in Hong Kong. Others says the rally remains unbroken.

     Nearly all strategists are bullish about the outlook for next year. But seeing how high shares have climbed in so little time, investors feeling overextended are likely to continue to consolidate their gains.

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