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July 30, 2009

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City stocks plunge amid record turnover

SHANGHAI shares slumped nearly 8 percent during trading yesterday amid profit-taking on worries that recent gains may not have mirrored earnings prospects and as more initial public offerings are set to surface in coming weeks.

However, transaction volume swelled to a record 296.9 billion yuan (US$43.46 billion), the highest in the Shanghai Stock Exchange's 19-year history, reflecting the fact that investors are divided toward the market's future, according to analysts.

The Shanghai Composite Index closed down 5 percent at 3,266.43, the biggest single-day drop in eight months.

The index picked up a little near the close after plunging at one stage by 7.6 percent as some investors found it an opportune time to speculate.

Some analysts blamed the Shanghai market dive on the trading debut of China State Construction Engineering Corp, the world's largest IPO in 16 months.

"The price-earnings ratio of the housing contractor is relatively high," said Wen Lijun, an analyst at Nanjing Securities Co.

"The sluggish debut performance failed to meet investors' expectations and affected market sentiment, triggering broad selling off on concerns that previous gains may have outpaced earnings growth," Wen said.

Shares in the country's largest housing contractor rose 56.22 percent to close at 6.53 yuan yesterday, a hefty rise but dwarfed in comparison with Sichuan Expressway which more than tripled its debut price on Monday.

The price-earnings ratio of China State Construction reached 80 on its debut, which is far higher than the industry average at 20.

"The plunge was not surprising considering the fact that assets bubbles have been increasing especially in blue chips," GF Securities Co wrote in a research note.

Shanghai's key stock index has skyrocketed 79 percent this year, making it the best-performing major market in the world, as a result of huge government stimulus incentives, record bank loans and widespread optimism of an economic recovery.
Analysts have mixed opinions.

Some believed the index could rebound immediately due to ample liquidity as yesterday's heavy turnover showed a lot of investors were buying into the market.
Others forecast that the market would stay weak in the short term.

"Concerns are growing as the pace of new share sales is accelerating," said Wen.
"The floats of blue chips such as Everbright Securities are sure to dilute market capital, causing a negative impact on the local index."

Lin Feng, an analyst of Aerospace Securities Co, said there had been frequent bourse rumors recently over fiscal policy.

"The market has been filled with speculation that the central bank will raise reserve requirements," Lin said. "But the Shanghai Composite Index should have support at 3,145 points."

The Shenzhen Composite Index, which tracks the smaller domestic market, retreated 5.83 percent to close at 1,072.11 points yesterday.


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