With the Shanghai Composite Index (SCI) down by more than 60% through mid-December, the big question is: Could things get any worse in 2009? Market participants agree that a tough last quarter of 2008 will be followed by an equally miserable first half of 2009.
"Most fund managers are pessimistic about the first half because of the economic downturn," said Alex Guo, head of institutional investments and sales at Tebon Securities in Shanghai.
Guo believes it will be a year of two halves: Once June has passed, the SCI will mount an aggressive rebound that could see it climb from around 2,000 points to 4,000-5,000 territory. It is here that opinions differ. Qiu Yanying, chief strategist at TX Consulting, an investment consultancy, expects a mild year, though he notes that the market is "very likely to have an unexpected great rise." Tao Yi, an analyst with Everbright Securities in Shanghai, predicts, at best, an upturn at the tail end of 2009. And Fraser Howie, who wrote a book about China’s stock markets, laughs off the notion of 4,000 points.
"That would be comparable to the bull market we had in 2007," he said. "A small rise I can go along with, but double? You have to wonder where the interest is going to come from."
Having already removed taxes on stock trades and done its best to limit the draining effect of formerly non-tradable shares coming on to the market, Beijing is expected to encourage further direct investment in stocks by the state. A designated stock market stabilization fund is thought likely.
Given the uncertainty, Guo believes new mechanisms such as short selling and margin lending – which may ultimately change the one-sided nature of the market – will be put on hold. To Howie, this is further evidence of Beijing’s neglect of fundamental reforms.
"The market will continue to fail companies because it continues to be a casino," he said. "It’s still short-term investors and an incredible dependency on the government to provide funds and keep things afloat."