Who's Your Daddy?

As mentioned a couple of days back, the daddy wants the market to bottom out. One move may not be sufficient, now the next within days. China's Ministry of Finance said that it will immediately cut a tax on trading to 0.1% of the value each purchase or sale of stock from 0.3%. The tax will fall to where it was a little less than a year ago when Beijing raised the trading charge in an attempt to stem then-overt speculation by individual investors.

From its peak on October 16th to its low last Friday, China's Shanghai Composite was down 49.2%. This decline is the worst bear market for Chinese equities since at least 1995 (the index began in 1990, but we only have price data back to 1995). The average Shanghai bear sees a decline of 32.91% and lasts 166 calendar days. China's stocks remain the most expensive relative to earnings among markets in Asia tracked by Bloomberg. The CSI 300 is valued at 26 times reported earnings, compared with 16 times for Japan's Nikkei-225 Stock Average and 15 times for Hong Kong's Hang Seng Index. The S&P 500 Index is trading at 22 times earnings.

China's consumer prices rose 8.3 percent in March as food costs jumped and after the worst snowstorms in half a century destroyed crops and paralyzed transport. Premier Wen Jiabao pledged ``forceful'' measures last month to tame inflation. The central bank told commercial banks to set aside more reserves for a third time this year on April 16, and three days earlier GovernorZhou said there's still room to raise interest rates.

While the government wants to restore confidence back to the markets, it also wants to tame inflation. The economic environment of high inflation and tighter monetary policy is not positive for the stock market. With that in mind, 3,000 seems to be a genuine bottom but it will have enormous difficulty breaching 4,000 this year unless inflation figures start to subside quickly.

China's economy, the world's fourth largest, grew 10.6 percent from a year earlier in the first three months, expanding by more than 10 percent for a ninth straight quarter. China being China will remain the most attractive long term emerging market. For investors willing to hold for a 3-5 year view, buying into some pure China Fund at current levels should be a very good investment decision. In addition, investors will get a positive hedge on the yuan as well.

p/s photo: Lee Sinje