China enters Year of the Pig after 112% growth

As China is about to enter the year of the pig in the Chinese calendar, the Shanghai Stock Exchange saw a phenomenal 112% growth last year, over four times the growth of the FTSE 250 (24%). Shanghai saw record trading volumes in January. Chinese investors will be hoping the new Chinese year starting this Sunday, 18 February, will be just as good.

However at the end of January senior Chinese officials were talking cautiously and advising investors to be wary after such sudden growth. Chinese radio stations are even issuing warning messages designed to slow down buying.

Tim Crawford, group economist at Clerical Medical said: “Rapid economic growth has certainly brought its own challenges for Chinese investors, particularly in the current environment of rising interest rates combined with government curbs on burgeoning sectors such as property, steel and automotives. However, we believe that there are positive long-term growth opportunities in China but prudent stock selection will be key as the New Year unfolds.”

History
The original Shanghai Stock Exchange closed in 1949 when the People's Republic of China was founded. The economic reforms of the late seventies and eighties resulted in its re-opening in 1990. It is the largest stock exchange in mainland China.

Shanghai first boom - 1997 - 2001
On 7 February 1997 the Shanghai index price was 1,006. It rose to over 1,500 during that year, but was back down to 1,258 by end of the 1997 and to 1,220 by the end of 1998.

A year later, on 3 January 2000, the Shanghai index had risen to 1,452 and by the end of January 2001 it had risen to 2,185. That boom peaked at a price of 2,337 on 13 June 2001, a growth of 132% since Chinese New Year 1997.

The Shanghai slump - 2001-2005
From that 2001 high, the Shanghai index more than halved to 1,062 by 11 July 2005. A ban on new IPOs started in April 2005 to curb the slump and allow more than US$200 billion of mostly state-owned equity to be converted to tradable shares. The ban pushed many IPOs to list in Hong Kong.

July 2005 - present
The last 18 months have seen phenomenal and well documented growth in China. Initially the stock market boom was slow with the price rising to 1,221 on 30 December 2005 from the low in July of 1,062.

The Shanghai Stock Exchange resumed full operation as the year long ban on IPOs was lifted in May 2006. The world's largest ever IPO (US$21.9 billion) by the Industrial and Commercial Bank of China (ICBC) was launched in both Shanghai and Hong Kong stock markets. By end of 2006 the index was 2,815. It more than doubled last year.

The Shanghai index reached an all-time high on 24 January 2007 at 3,125. A near 300% rise in 18 months. After 30 years of near double-digit average annual economic growth China is about to overtake Germany to become the world's third largest economy.

Hong Kong – ten year review
On Chinese New Year in 1997 (7 February) the Hang Seng Index, the main indicator of the Hong Kong market, was at 13,661. The collapse of the Thai baht, on July 2 1997, came twenty-four hours after the United Kingdom handed over sovereignty of Hong Kong to the People's Republic of China.

In October 1997, the Hong Kong dollar came under speculative pressure. The Hong Kong authorities declared war with speculators. The Government ended up buying approximately HK$120 billion of shares of various companies. Since Hong Kong had more than US$80 billion of foreign reserves it managed to keep the currency pegged to the US dollar despite the speculative attacks.

The attacks against the Hong Kong Dollar and the stock market did not continue into September. But by 11 August 1998 the Hang Seng Index had halved to 6,780.

Strong growth followed up to a price of 17,072 in January 2000. In 2001, The Government divested itself from its investments and made a profit of about HK$30 billion in the process.

By 24 April 2003 the market had again halved to a price of 8,442 before beginning a steady growth track that it is still on today. The Hang Seng grew by 33% in 2006, which is very different to the 112% growth of the Shanghai index. On 24 January 2007 the Hang Seng reached an all-time high of 20,821.