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November 3, 2009

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Sell-off has ChiNext in a tailspin

MOST stocks traded on China's new Nasdaq-style stock exchange plunged by the daily limit yesterday after all of them surged wildly on their Friday debut.

The huge swings reflect the difficulties regulators face in discouraging speculation and dampening market volatility.

Twenty of the 28 firms listed on the ChiNext market in Shenzhen slumped 10 percent yesterday while only three rose. The decline on the entire board averaged 8.15 percent, and turnover shrank 65 percent from Friday to 7.74 billion yuan (US$1.13 billion).

What a difference a trading day makes. On Friday, ChiNext-listed companies soared by 106 percent on average from their issue prices. Trading in every share was temporarily suspended at least once during the day under rules designed to moderate price swings. But on the second day of trading, public companies on China's mainland are allowed to rise or fall only by up to 10 percent overall.

"It (the slump) was expected as valuations were unreasonably high," said Liu Yu, an Orient Securities Co trader. "The losing streak will continue unless regulators add new supplies of equities swiftly."

Despite yesterday's losses, the average price-to-earnings ratio for the 28 stocks on ChiNext stands at 70.8, compared with 33.1 on the Shanghai Composite Index, which tracks China's main board, according to Bloomberg data.

The roller-coaster ride on ChiNext highlighted the urgency for regulators to increase the amount of shares available for trading, boost oversight of investors' activities and ensure sufficient corporate disclosure, analysts said.

Shang Fulin, chairman of the China Securities Regulatory Commission, said late last month that trading on ChiNext would likely be "irrational" and that the agency's top priority is to prevent risks. "Those benefiting most from ChiNext are the companies listed on the board and their bosses," said Xu Xiaojin, a 27-year-old engineer who's been investing in stocks for five years. "We retail investors get almost nothing except risks. Only gamblers will get into the market now."

The first batch of 28 firms listed on ChiNext raised a combined 15.48 billion yuan last month in their initial public offerings, more than double the 7.08 billion yuan target.

Market observers believe the enthusiasm over new stock issues on ChiNext will likely continue despite the extreme market volatility because of the huge gains on the trading debut.

"Investors winning allotments in ChiNext IPOs will have a growing tendency to sell the shares as soon as trading starts," said Lu Bilin, a Guosen Securities trader. "The upcoming listings may not be able to double in stock prices as investors grow cautious."

Yesterday's plunge on ChiNext coincided with a rally in the main markets after a key index of the country's manufacturing activities jumped to its highest level in 18 months.


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