2010-06-28 09:12

Investors check stock prices on a screen at a securities trading fi rm in Shanghai. Beijing's ending of the yuan's peg from the dollar last week temporarily boosted some share prices on the domestic securities A-share market. [Kevin Lee / Bloomberg]

De-pegging from the dollar 'likely to cause only short-term rally'

BEIJING - The recent rally in China's A-share market sparked by the speculation of a stronger yuan is likely to be short-lived as investors grow skeptical that Beijing's move to de-peg the currency from the dollar will have an immediate and substantial impact, analysts said.

The benchmark Shanghai Composite Index retreated by 0.5 percent last Friday, trimming the weekly gain, as the high expectation that yuan revaluation would substantially lift the market faded away.

"We are cautious about the short-term rally in the market, which we think is unlikely to be sustained," said Wang Fenghua, an analyst at Hongyuan Securities in Beijing.

Beijing's ending of the yuan's peg from the dollar last week temporarily boosted share prices of airlines, paper manufacturers, developers and banks, which will benefit from a stronger currency.

However, concerns of shrinking liquidity, slowing economic and corporate earning growth and fundraising pressure still exist in the market and they may continue to weigh on it, Wang said.

The Shanghai index surged after the central bank said it would make the nation's currency more flexible, boosting speculation the yuan will strengthen and easing investors' worries about an interest-rate hike to tame inflation.

The central bank set the yuan's central parity rate against the dollar at 6.7896 last Friday, the highest since July 2005, when the country started its yuan appreciation process.

But analysts said the new yuan reform was not aimed at a one-time sharp appreciation, but rather was a market-oriented reform designed to keep the currency stable. Thus any revaluation of the yuan would be very gradual.

Guosen Securities estimated that the chance of a sharp revaluation of the yuan was slim and the currency was likely to rise by only one to two percent in the second half of the year.

Overseas fund managers did not buy into expectations in some quarters that the yuan's revaluation would boost the Chinese equity market. Mark Mobius, fund manager at Templeton Asset Management Ltd, was quoted by Bloomberg as saying that the end of the yuan's exchange-rate peg had not made China's stocks more attractive.

"The yuan appreciation will not have a dramatic impact since the exchange rate change is not expected to be significant," said Mobius, who oversees about $34 billion in emerging markets.

But some analysts and traders believe that the low valuations of Chinese stocks may offer a good entry point for investors.

The gap between share prices in Chinese companies dual-listed in Shanghai and Hong Kong has shrunk dramatically in recent days as the benchmark Shanghai index has tumbled nearly 20 percent since April.

Some analysts said that worries about Beijing's property tightening and potential economic slowdown were overstated and any signs of the government's shift to an easing stance should provide a boost to the market.