Wednesday, May 07, 2008

Paper Dragon

I have made the argument here before that China is experiencing a bubble of its own and that 10% growth is unsustainable in a De facto centrally planned economy rife with cronyism and corruption. (not to mention that nearly 50% of the "earnings" of Chinese companies derive from stock market gains)

In addition to the above, it is beneficial to analyze the micro market and determine what events could serve as a catalyst to the inevitable volatility. The below is one such instance.

China's markets brace for massive share inflow: report Tue May 6, 1:11 AM ET

Chinese stock markets are bracing for fresh pressure in May when a massive number of new shares will become freely tradable after being locked up under local regulations, state media said on Tuesday.

A total of 284.1 billion yuan (40.6 billion dollars) worth of shares will become freely tradable in May at the expiry of a mandatory lock-up period, the Shanghai Securities News reported.

This is up nearly 90 percent from 150 billion yuan of newly tradable shares in April but was still in line with the monthly average for the whole year, according to the paper.

China's stock market hit a historic high in October, but then slumped by nearly half in the ensuing months, partly due to the overhang of these shares.

Only in late April did the market stage a rally, encouraged by a decision by Beijing policy makers to cut a stock transaction tax to one third.

Out of the shares that will become tradable in May, slightly more than half will be in Bank of Communications, the newspaper said.

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