The devastating quake shakes the nation, and stock market of China

Quake tremors the market

The earthquake catastrophe happened yesterday in Sichuan province in China shocked the whole world community. The shockwave today rippled to the Chinese stock market.

 

The Shanghai composite index dropped 1.84%, as the sentiment in the market became low due to the hovering uncertainty of the situation in Sichuan. Moreover, 66 Sichuan-based listed companies and companies with business in Sichuan were suspended from trading for the whole-day session.

 

Companies pocket in unexpected windfalls

Not surprisingly, shares of listed pharmaceutical companies all reaped sharp gain today; stocks of four large-scale companies in the industry reached the 10% daily increase cap. The investors are betting on huge input of medical spending on the after math of the quake, which was measured at 7.8 degree on richer scale.

 

As the rescue contingency team is reaching closer to the epicentre, much more casualties will emerge.

 

Not disaster for all

How the market will perform against this anguish background is unpredictable, however the market analysts predict that investors will flock into companies in construction sector and medical sector, the two most directly affiliated industries in the region rebuilding work after the destruction.

Hot money covets China

An estimated US$80 billion hot money flushed into China mainland in the first season, leaving the accumulative sum to a whopping US$800 billion. The speculative money finds China a haven for the following reasons.

 

1, China is somewhat insulated to the credit crunch
As the economy in US and other developed markets are experiencing drastic corrections, China still sustains its double digit economic growth this year.

 

2, High expectation for RMB (Chinese currency) exchange rate hike
RMB is said to be undervalued for at least 20%. The Chinese administration acknowledged the fact and let RMB appreciated by 7% against USD in the first season in 2008, leaving the annual appreciation range to 10-15%. 

 

 

3, High net investment value of RMB denominated assets
Besides the currency appreciation, the value of RMB denominated assets, such as securities and real estates, has seen continuous double-digit gains in the past few years. The momentum is set to continue because of the undergoing urbanization and market-oriented economic reform in China.  

 

 

4, High interest rate

In order to prevent Chinese economy from over-heating, the Chinese administration introduced a slate of measures since the end of last year; interest rate has been raised consecutively since then. The current one-year borrowing rate stands at 7.47%; the one-year deposit rate is 4.14%. The rate gap between China and the US is 2.14 percentage points (Fed lowered rate again to 2% last week). The huge gap, which is still widening, stimulates more hot money flow from US and other low interest rate markets to China.

 

 

Number of China internet users: 221,000,000

 

It is reported that, by the weekend, China has seen its registered internet users exceed 200 millions, outnumbering the US. The same as its demographic population, China now has the largest internet population of the world; the figure might surprise many dotcoms because they have not expected the change would come so fast. By the end of last year, the correspondent figure was only150 millions.

 

 

Government efforts behind the scence 

The Chinese administration has been investing heavily in the recent years, according to the Ministry of Industrialization and Information of China, who released the figure. Huge tranches of money were channeled to internet infrastructure development nationwide. Broadband connection and WIFI spots are sprouting in major Chinese cities. 

 

 

More internet users = more money

Despite the gloomy overall economic prospect around the world, IT business is China is still expected to sustain rapid annual growth, according to some market insiders. “The unprecedented state input into IT sector spawns multiple business opportunities for IT companies,” said Li Kaifu of Google China, “moreover, the vast internet user base in China also bears huge potential for future development.”

China stock market erupted 9.3% after government stimulus pack

9.3 percent, Shanghai composite index of China erupted on Thursday, achieving its highest single day session gain in six years. Before that, the market plummeted from the peak of 6014 points late last year to less than 3000 points on Tuesday this week.

 

Miracle in the market 

The dramatic scenario happened after the China Security Regulatory Commission, the stock market watch dog of China, and Ministry of Finance announced a plan to slash the stock trading stamp tax from the current level of 0.3% to 0.1%, effective from today. The move had been long anticipated by both investors and market observers, who blamed the market regulators for standing by the excessive market correction since last October.

 

Sentiment in the market was so high today that the trading volume in Shanghai garnered a staggering RMB 195.6 billion yuan (US$ 27.9 billion), almost doubled that of the previous day. Meanwhile, among the overall more than 1400 listed companies, only three saw their stock price dropped. More than 860 stocks topped the 10% daily increase cap set by the market regulators.

 

Can the market boom continue? 

Given the current economic situation in China, such a frenzy increase won’t be sustainable. In order to cool down the potentially overheating economy of China, the government ushered in a series of measures pinpointing at reining in the oversupply of capital in the market. The measures included increasing interest rate and bank deposit reserve ratio, the capital chain of Chinese companies are getting extremely tighter and tighter. 

 

 

 

Global trap for China economy 

Moreover, the overall global economic prospect is still perceived to be gloomy, the recession that is sweeping across the US and European countries will in turn hurt the economies of developing countries, those countries rely heavily on trade with the developed ones. China is one example, a lowering demand for products and services from China is set to affect the listed companies’ revenue in 2008, which in turn will lessen the earnings per stock and result in a less-than-expected increase rate for the company.