The Wall Street Journal-20080205-For Investors- the Games Have Begun- China-s Stocks Advance On -Olympics Factor-
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For Investors, the Games Have Begun; China's Stocks Advance On 'Olympics Factor'
Full Text (1330 words)Shanghai -- In the U.S., there is the "Bernanke put," the belief of investors that the Federal Reserve, under Chairman Ben Bernanke, will cut interest rates to prop up a quaking stock market. Chinese investors are counting on the "Olympics put."
Yesterday's 8.1% rebound in China's stock market underscores a widespread, if possibly unwise, source of confidence among the country's investors: the belief that authorities will make sure the stock market is healthy when the Summer Olympics open in August in Beijing.
The benchmark Shanghai Composite Index had its best session since June 2005, surging to 4672.17 after months of weakness. Signs that transportation gridlock was easing after weeks of heavy snow, and Wall Street's rally Friday, helped to encourage investors to buy before the weeklong Lunar New Year holiday that starts tomorrow.
But perhaps the biggest trigger, analysts said, was the perception among investors that Beijing is moving to shore up the market, as seen in the approval of new mutual funds for the first time in months.
That confidence persists although the index remains in bear-market territory, or roughly a decline of 20% or more from a peak, for the first time since 2005. It is down 23% since October, when many of the world's benchmark stock indicators crested.
"I dare not count my losses," said Liu Meina, a 29-year-old investor in Shanghai. "But," she added, "I still feel a little confident about this year and think stocks will rebound from this March."
Trust in the Olympics factor is a reminder that China's most powerful investor base, tens of millions of individuals, often adopts unconventional trading strategies. It also reflects a recognition that the government influences the market as much as economic forces in China. Indeed, it was government action, in the form of a sweeping change to the share structure of publicly traded companies, that ignited China's market in mid-2005.
Driving that trust are expectations that the government has the desire and wherewithal to ensure that everything in China, from Beijing's air quality to Shanghai's stock index, looks presentable when a world-wide television audience tunes in to the opening ceremonies.
Few think Beijing would actually buy shares to support the market if it faltered too much, although it could instruct state-owned companies to do so. Yet Beijing has a deep reserve of policy options that might be powerful, from allowing more foreign investment to blocking new fund-raising by Chinese companies that would increase the amount of stock in the market and dilute prices.
Yesterday, investors were cheered by news that regulators approved the first mutual-fund launches since August. That could channel as much as $2 billion into stocks. Last week, China Railway Construction canceled the marketing of a planned offering of as much as $4 billion of stock after a delay in gaining approval from regulators, according to a person familiar with the situation.
Officials also could boost the market simply by voicing support for it, although that is something they have seemed reluctant to do lately. Senior leaders have hardly even mentioned stock values since early 2005.
International precedent suggests an Olympic bull run. For all but one of the past five Summer Games, starting with Seoul in 1988, stocks have risen, sometimes powerfully, in the host nation during the Olympic year. The exception is Spain's IBEX 35 index, which shed 6% in 1992. In the four times since 1904 that the Summer Games have been held in the U.S., the Dow Jones Industrial Average rose twice and lost ground twice.
The bullish view has been espoused in China's corridors of power. History proves "the Olympics affects the stock market by affecting the economy and people's confidence," said a widely syndicated editorial that appeared Jan. 15 in the Shanghai Securities News. The newspaper, published by securities regulators, said the Games provide their primary market boost in the 18 months leading up to the event and the effect wears off by the second year afterward.
Even if the Shanghai Composite Index doesn't move between now and the Aug. 8 start of the Games, it would hold a whopping 72% rise for the prior 18 months.
The Shanghai market and its counterpart in Shenzhen are mostly closed to foreign investors. Despite the tumble of recent months, the price-to-earnings ratio for Shanghai shares remained at a lofty 53 times last year's profits at yesterday's close, in part reflecting how China's investors face limitations on overseas investment and have therefore tolerated higher-priced stock at home.
Shanghai's total market capitalization has fallen to $3.31 trillion, from $3.83 trillion at its peak late last year.
Influential personalities have championed the Olympics effect. Cheng Siwei, a top legislator and economist who a year ago warned the stock market already was in a bubble, was quoted in late December forecasting a "slow bullish market" this year ahead of the Games. Cao Fengqi, director of the financial and securities research center at Peking University, last week reiterated his view: "Don't sell" unless you want to "burn your fingers."
Of course, even China's government could fail to come through. Officials may well decide that leaving investors disappointed now beats setting up the market for an almost certain tumble after the Games.
And were the bear market to steepen now, the momentum of falling stock prices could be hard for the government to stop.
Indeed, some previous bulls are now hedging. Until recently, Jin Yanshi, chief economist of Guojin Securities Co., was predicting the Olympics might help the benchmark index soar this year to a record 8000 points. Last week, with losses mounting, he recanted. "It was an incorrect view to say the Olympics is the turning point" for China's market, Mr. Jin said.
"Now, it is my hope, not my expectation, that stocks will perform well in the Olympic year," says Zhu Shurong, a 57-year-old in Shanghai. "The government is the key, but there is no sign [yet] the government will save the market."
Offer for Yahoo
Boosts Internet Shares
Internet stocks led a broad rally in Asian markets, buoyed by news of Microsoft's offer for Yahoo. European stocks, meanwhile finished mixed after losing earlier gains due to increasing fears of a U.S. recession.
The Microsoft bid for Yahoo, announced Friday, boosted Alibaba.com 14% in Hong Kong. Yahoo owns 39% of Alibaba.
In TOKYO, Yahoo Japan was swamped with buy orders and didn't trade for most of the day. It gained 10% just before the market closed. Yahoo owns about a third of its Japanese affiliate. Softbank, which has about a 40% stake in Yahoo Japan, gained 16%. Broadly, Japan's Nikkei Stock Average rose 2.7% to 13859.70.
Partly because of big gains in Shanghai, Chinese stocks that trade in HONG KONG soared, with the Hang Seng China Enterprises Index climbing 6.3% to 14120.84. The benchmark Hang Seng Index climbed 3.8% to 25032.08. Chinese insurers, banks and property developers led the market higher. Ping An Insurance rose 12%.
In LONDON, the FTSE 100 Index eased 0.1% to 6026.20. Ryanair finished down 2.6%, after having been down more than 10%. Europe's largest low-cost airline reported a 27% drop in adjusted third-quarter profit because of lower ticket prices. It also warned that higher fuel prices and weaker consumer spending could cut next year's profit by as much as 50%.
In TORONTO, stocks fell, as gains in the energy sector were undermined by weakness in financials and golds. The S&P/TSX Composite Index fell 57.33 points, or 0.43%, to 13261.04. Elvis Picardo, investment strategist at Northern Securities, said there was profit- taking after a "good run" last week, triggered by central bank interest-rate cuts in the U.S., as well as Canada. But he sees more bumps down the road.
"I really think it's going to be quite choppy and volatile. The numbers coming out of the U.S. continue to be quite weak," he said. But he's noticed more money flowing into defensive sectors, like telecoms and utilities.
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Bai Lin, Ellen Zhu and Wynne Wang in Shanghai contributed to this article.
