March 24, 2014 2:00 pm JST

Shanghai stocks stay low, for now


HONG KONG -- Shanghai stock prices continue to move in a lower range. On March 12, the Shanghai Stock Exchange Composite Index crossed below the 2,000 line to 1,997, its lowest point a month and a half.

     Since then, signs have emerged of the market bottoming out. The consensus among traders is that the Chinese economy has reached a critical point, and this has translated into a directionless market.

     The Shanghai index has been declining since Feb. 19. Investors have been selling stocks partly due to concerns over defaults from so-called shadow banking products. On March 7, solar panel manufacturer Shanghai Chaori Solar Energy Science & Technology became the first company in China's corporate bond market to default. Concerns over more potential defaults has affected investor sentiment since.

     The slowdown in the real economy also has stirred risk-averse selling. The Manufacturing Purchasing Managers' Index has been deteriorating. Exports in February fell nearly 20% on a year-on-year basis. The market had been expecting exports to increase slightly.

Waiting on reforms

The Shanghai index's decline stopped after the National People's Congress, closed on March 13. That day, Chinese Premier Li Keqiang expressed his confidence in containing financial unease. This helped spur the buying of financial stocks and other issues.

     Major macroeconomic indicators for January and February, released the same day as Li's comments, fell below market expectations. But bargain buying was strong enough to keep the index from dropping.

     On March 15, the People's Bank of China, the country's central bank, announced an expansion in the yuan's trading band. Shen Jianguang, an economist at Mizuho Securities Asia, said that Beijing has shown its commitment to promoting financial reform despite the slowing of the economy.

     Many market experts are positive that Beijing has a strong desire to initiate reforms. However, concerns over the economic outlook still remain. New home prices in China's 70 largest cities, announced March 18, were down for February. Concerns are growing as properties make up a significant proportion of the economy.

     Major indicators such as the growth rate for the January-March quarter will be released in mid-April. As such, both selling and buying are not likely to increase momentum for the time being.