Chinese Stock Market "Smashes" Records Two Days in a Row

2007 is shaping up to be an interesting ride for local Chinese Exchanges.

The Shanghai Composite Index, which tracks domestic Chinese RMB-denominated A-shares and foreign currency denominated B-shares, jumped 1.4% on Monday to close at 3040. This was the highest close since the bourse was launched in 1990. Three of China's largest steel companies lead the charge as Baoshan Steel, Angang Steel and Wuhan Iron and Steel jumped 8 percent, 8 percent and 6.5 percent respectively. Mainland banks China Merchants Bank, China Minsheng Bank and The Industrial and Commercial Bank, which had been responsible for much of last year's rally, fell 5.6 percent, 4.1 percent and 0.8 percent respectively in response to the central government ordering lenders to increase reserve-ratio requirements from 9.5 percent to 10 percent.

On Tuesday, the Shanghai Composite Index fell 8.84% to close at 2771.79, again "smashing" records as institutions locked in profits and individuals sold in response. This was the largest single-day fall since 1997 when the market dipped 8.91 percent following the death of former Communist Party leader Deng Xiaoping. A few listed stocks, including Chan Vanke Co (the nation's largest property developer) and China United Telecommunications Corp (China's second largest mobile carrier), fell 10 percent, the single day limit for individual stocks. Trading volume hit record levels soaring to 131.6 billion yuan (US $16.57 billion), a 42 percent increase over the volume during yesterday's rise. One market participant noted, "selling sentiment might continue for some time if there is no strong policy stimulus from the government." Someone should let this guy know the government is probably very relieved by the pull-back as they have been trying to figure ways to cool the red-hot local stock market that rose over 130% last year and was already up 15% for 2007.

Smart market players will see yesterday's pullback as a buying opportunity and look to jump back in. Liquidity continues to slosh around the markets as China launched a new US $1.29 billion mutual fund (the first new fund in 4 months) yesterday that sold out within 2 hours. Shanghai is also reportedly preparing to allow H-shares, Hong-Kong listed mainland companies, to start trading on local exchanges "soon" in an attempt to continue to increase the size and quality of the domestic market. These will be referred to as CDRs, Chinese depositary receipts. China Mobile and PetroChina are rumored to be among the first Hong-Kong listed mainland companies to sell CDRs. Hold on to your hats, because 2007 should be a wild ride.