Independent UK: Slowdown in new issues fuels fears over China

Slowdown in new issues fuels fears over China
By Sean O'Grady, Economics Editor
Published: 09 January 2008


The first signs that China's stock market bubble may be about to burst emerged yesterday as research from the Chinese Xinhua Finance company and the Milken Institute indicated a sharp decline in the value of shares recently floated on the Chinese exchanges.

The China IPO (initial public offering) indicator tracks the price of shares listed on the Shanghai, Shenzhen and Hong Kong markets. The latest calculation of the index, for November, shows that the Chinese markets gave up most of their gains from the summer, "demonstrating a growing belief that Chinese equities are overvalued and fears of tightening monetary policy to control inflation", according to Xinhua. Of the 118 equities included in the previous two months, 15 increased in price and 103 fell.

Economists have long wondered how long the Chinese stock market boom could last. The composite CSI 300 index of large Chinese shares rose by 160 per cent in local currency terms last year, the largest increase in any mainstream stock market in the world. Anecdotal evidence suggests many Chinese of relatively modest means have begun to play the market, and some foreign funds have turned to the East as returns in Western markets have faded during the credit crunch. A sharp, sustained correction would have an immediately devastating impact on them, with wider reverberations throughout Asia and the world. The 15 per cent fall in the Chinese market last February prompted a worldwide equity sell-off.

The biggest threat to the stability of the Chinese markets is the growing evidence that the economy there is overheating. Growth this year is forecast to top 10 per cent again, but it is now accompanied by rising price levels.

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Any prolonged disturbance in financial markets would make the authorities' strategy vastly more difficult, as well as jeop-ardising China's economic growth. In 2008, for the first time, China is expected to contribute more to global economic growth than America. Were China to stall after a stock market crash, the chances of a global recession would thus be greatly magnified. The World Bank warned yesterday that world growth would ease to 3.3 per cent in 2008, down from 3.6 per cent last year. ......(more)

The complete piece is at: http://news.independent.co.uk/business/news/article3321423.ece