Although the stock market rally in the past year seems to have lost much of its steam, analysts remain confident of the upward trend, albeit at a much more moderate curve.

 

Any notion of a possible meltdown has been largely discarded as the market still basks in ample liquidity. The rumblings of the US subprime mortgage crisis sound nothing more than a vague and distant threat.

 

So far, government credit tightening measures, including interest rate increases, have made only short-lived impacts on investor sentiment because of the lack of leveraged trading. What's more, the huge supply of new scrips in various mega IPOs were absorbed without causing any durable liquidity strain.

 

What's helped cool down the stock market fever a little is growing investor concern about overvaluation and a possible slowdown in corporate earnings growth. But with so much liquidity swishing around the system, none of these factors could squeeze out the market bull.

 

"The excess liquidity in the Chinese economy is unlikely to disappear anytime soon," said Shen Minggao, an economist at Citigroup.

 

Shen added that the rising trade surplus and current surplus had led to speculation on currency appreciation. Capital inflows through direct investment and current account activities have also surged.

 

In addition, recent re-pricing of risk amid the subprime crisis in developed markets and expected Fed cuts would mean more capital inflows to emerging market economies.

 

"We expect in the near term a range-trading or even market correction in the coming months," said Jerry Lou, an economist at Morgan Stanley. But as the ample liquidity still remains, "we are likely to stay bullish for most of 2008".

 

The government has also announced some measures to encourage capital outflows, including the qualified domestic institutional investor system and the "through train" for individuals to invest in the Hong Kong stock market.

 

Shen said a liquidity crunch is unlikely in the near term given foreign investors' increasing interest in renminbi assets, but a reversal of liquidity flows is still likely as long as the global market remains volatile.

 

Corporate earnings growth is expected to slow with the weak stock market performance because at least one-third of the earnings growth was a result of the booming market from revaluations of investment portfolios and capital gains, experts said.

 

"Headline earnings growth could easily disappoint due to the role of stock market gains in the profit numbers this year," said Jonanthan Anderson, senior economist at UBS Investment Research.

 

But analysts said a massive market sell-off or meltdown is unlikely.

 

"The stock market collapse is not expected to happen because there is no margin trading system in China," said Cao Honghui, a researcher with the Chinese Academy of Social Sciences. Unlike the US consumer, who borrows about 60 percent of what he or she spends, Chinese consumers are borrowing less than 5 percent.

 

"We could view a market correction as canceling some positive effects from the recent rally. Given the authorities' priorities to maintain social and economic stability, the scenario of a sharp market correction doesn't look likely in the short term," said Shen.

 

Experts said stocks in the consumer sector, such as consumer products, retail and telecom, are worth investing this year as their earnings are based on much safer and strong volume growth.

 

Asset-price-sensitive sectors, including banks, insurance, real estate, oil and material are more dangerous to invest in because of their exposure to tightening risks and US recession.

 

"Medical consumption companies and electrical appliance companies are expected to perform well because the government is expected to invest significantly in the social security and healthcare systems," said Gui Haoming, chief analyst at Shanghai Shenyin Wanguo Securities.

 

"Following slower year-on-year credit growth, financial institutions should also see slower profit growth in the fourth quarter as the government calls for credit tightening," said Shen.

 

Shen added that share prices of listed banks could be under pressure, and non-performing loans at some banks could build up if firms suffer from financial distress in the near future. Those who rely more on interest income may suffer the most.

 

(China Daily January 3, 2008)