SHANGHAI, June 30 (SMM) –
China's A-shares market tumbled on June 29th along with China's Agricultural Bank huge IPO, a slowing growth of domestic fixed asset investment, as well as tightening liquidity in the US and Europe. As a result, SHFE base metal market fell across the board. SMM believes base metal markets in China will continue its downward corrections in the short term, given uncertainties over the recovery of global economy.
World's Largest IPO Plagues China's Finance Markets
The Agricultural Bank of China, also known as ABC, set the price range for its Shanghai shares at 2.52 yuan-2.68 yuan ($0.37-$0.39), and for Hong Kong at HK$ 2.88 to HK$3.48 ($0.37-$0.45). The bank's initial public offering in Shanghai and Hong Kong could exceed the record USD 21.9 billion IPO by Industrial and Commercial Bank of China in October 2006, becoming the world's largest IPO in the post-crisis era. The announcement of IPO plan by the rural lender is a turning point for China's finance markets recently. After ABC released its IPO, market has been dominated by shorts. The benchmark Shanghai Composite Index tumbled to 2425.93 points after dropping below 2,500 points on Tuesday's morning, setting a new 14-month low. SMM believes market remains under pressure due to liquidity jitters from a state-owned bank's huge share sale
Falling Fixed Asset Investment to Slow Economic Growth
China's National Development and Reform Commission (NDRC) released on June 29th that China's urban fixed asset investment rose by 25.9% year-on-year to RMB 6735.83 billion during the first five months of 2010, with the growth rate falling by 7 percentage points on a yearly basis, indicating China's fixed asset investment, a major driver for economic growth, has declined sharply since the start of 2010. The impact from economic stimulus plans is fading, and China's government-led investment will drop, and the growth of property investment will slow as well negatively affected by China's inflation curbs, which will drag down the growth rate of fixed asset investment.
China's export growth will face heavy pressure in view of the European sovereign debt crisis, China's possible RMB appreciation, and China's move to eliminate export tax rebates on some commodities. In addition, purchasing power may have been partly eroded by China's move to boost domestic consumption through large-scale economic stimulus package in 2009, and it will also take longer time to transform China's economic mode, so investment, rather than consumption, will remain a major driver for economic growth in the short term. In this context, SMM believes China's GDP growth will slow in 2H 2010 amid uncertainties surrounding domestic and overseas economic conditions, and as China's economic development mode enters a transition period.
Tighter Overseas Liquidity
Most European and the US major financial markets have slumped recently and the US equity market fell sharply on June 29th. The concern over global economic growth was rekindled in the market, triggering buying of risk aversion assets like the US dollar and the US treasury, but sell-offs of heavy-weights like Boeing and Alcoa. The banks in the Euro zone are required to pay back EUR 440 billion of one-year loans, triggering market concern over possible inadequate liquidity in the market. Meanwhile, investors are more concerned that the global economic prospect will be potentially overshadowed by G20 Summit's commitment to cut deficits.
Base Metal May Still Have Room to Fall Further
SHFE copper, aluminum and zinc prices had bottomed out during the previous two weeks starting from June 9th. SHFE zinc market was prevailed by speculative funds, pushing up zinc prices by 14.92% from the bottom, but arbitraging room narrowed after position squaring on June 28th. The slumping metal prices on June 29th thoroughly suggested speculative behaviors by longs. Technical indicators suggest that base metal prices are on a downward track. SHFE zinc prices have already turned downward currently after failing to climb above moving averages last week. The plunging metal prices on June 29th suggested strong short positions, ending a two-week rebound movement. The entire financial market is prevailed by panic sentiment along with the new record low of A-shares market in Shanghai, and the declining pace of metal prices is expected to accelerate in the short term. Market participants are suggested to keep alert and enter the market when market trend becomes clearer, while any bottom fishing behavior is not appropriate at present.
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