Chinese A-share Stock Market Hiccups...Again

After reaching an all time high earlier this week, the Chinese A-share stock market experienced a hiccup on Thursday falling 4.52 percent (163.38 points) to close at 3449.02. This correction, if you can call it that, was only half of the 9 percent pull-back the A-share market experienced on February 27 that sent a ripple effect to stock markets globally. Only 6 stocks reached the upward 10 percent daily trading limit on Thursday while over 40 fell by the 10 percent daily limit. This is a stark contrast to the past few months on the A-share market where approximately 50 stocks reached their upward daily limit on average while roughly 10 fell to the lower daily limit. Stocks reaching their upward daily limit on Thursday included three pharmaceutical companies: Da An Gene Co Ltd. (SHE-002030); Hubei Guangji Pharmaceutical (SHE: 000952); Chongqing Huapont Pharmaceutical (SHE: 002004).

The Chinese A-share market is largely driven by the whims of domestic retail investors instead of objective fundamental analysis that many in the west are accustomed to. Throughout the week, the sentiment was even the most optimistic retail investors were becoming increasingly apprehensive about the uninterrupted torrid upward movement of the market since the February 27 pull-back. More than 897,000 new trading accounts were opened from April 12-16, an average of roughly 200,000 per day. To put this statistic in context, approximately 850,000 trading accounts were opened during all of 2005. It is estimated these new market participants injected $800 million USD of capital into the market daily.

Following the 130 percent increase in the Chinese A-share stock market in 2006 and an over 30 percent increase thus far in 2007, a correction is natural. With the official Chinese May Holiday on the horizon next week, a continued ease off of the accelerator would not come as a surprise as domestic investors liquidate their holdings prior to the holiday. Many believe global investors were unjustifiably spooked by and overacted to the sudden pull-back in the Chinese A-share market on February 27. It will be interesting to see if history repeats itself and global markets take a cue from China's lead or if they brush the Chinese A-share market hiccup off as inconsequential.