Volatility in market expected this week

By Richard Fu  |   2008-6-23  |     NEWSPAPER EDITION

THE recent volatility seen in the Shanghai stock market in past weeks are expected to remain this week, analysts predicted.

They said the overall prevailing weak sentiment in the market needs to vanish, despite a rebound last Friday led by oil companies and utilities on a government move to increase fuel and power prices.

The Shanghai Composite Index declined 1.29 percent to 2,831.74 last week, having moved between 2,695.63 and 2,945.42.

Qian Qimin, a Shenyin Wanguo Securities analyst, said though the energy-price hikes, announced Thursday night, had bolstered oil refiners and power producers, they also have a negative impact on the market as this may accelerate inflation and lead to further tightening measures.

Speaking in the United States, Chinese central bank Governor Zhou Xiaochuan said "stronger policies" may be formulated to cope with the inflation exacerbated by the latest price increases.

Qian said the benchmark index may fall further although the downside could be limited at above the level of 2,600.

"Power utilities had a stellar performance on Friday, but I don't think the tariff rise would make them that attractive as most of them lost money or earned a tiny profit in the first quarter. The energy-price hike only ease the distorted prices, but didn't fundamentally normalize the pricing scheme," Qian said.

The price rises will also erode margins of manufacturers and other industries, fanning further worries of slowdown in corporate earnings.

Aluminum Corp of China, which said last Friday its first-half profit will fall by more than half on cost inflation and production disruption from the February snowstorms, will pay higher electricity bills from July 1 when the new tariffs take effect.

Yi Xiaobin of China Galaxy Securities was a bit more optimistic, saying the rise in turnover on Wednesday and Friday when the Shanghai index climbed indicated more capital may have started to return to the market.

He predicted the index to move between 2,800 and 3,300 this week.