The cut in stamp duty was nothing if not expected. With the Shanghai Composite Index (SCI) languishing 50% down on its October peak, the regulator finally stepped in and reduced the tax paid on stock market transactions to 0.1% from 0.3%.
Given that the exact reverse of this action, implemented in May 2007, prompted the SCI to fall 20% in a week, the investor response was also predictable. The index jumped 9.3% when the change took effect on April 24, closing at 3,583.03 points. It crossed the 3,700-point boundary not long after.
The Red Dragon Fund’s consensus prediction was that the SCI would reach 4,000 on the back of the tax cut. One of the reasons it did not was the way the regulator dealt with two shareholders who violated newly installed rules relating to the non-tradable share reform program.
As of mid-April, holders of previously non-tradable shares are now obliged to sell their holdings in blocks if the number of shares they want to sell exceeds 1% of a firm’s total share capital. On April 30, two minor shareholders of Sichuan Hongda (600331) unwound 1.46% and 1.35% of their holdings respectively.
The Shanghai Stock Exchange banned the two investors from trading Sichuan Hongda stocks for a period of 30 days. But it said that future offenders would face longer bans and would have to buy back the excess stock they sold.
This undermined investor confidence at a time when there are already serious concerns about inflation.
Consumer prices rose 8.5% in April, up slightly on the previous month. This suggests that, despite talk of price controls and cooling measures, the government has yet to bring the economy under control. Beijing responded by raising banks’ required reserve ratios – in order to drain liquidity from the market – but it remains to be seen what effect this will have.
The May inflation figures will be of great interest to equities investors.
Although the tragic earthquake in Sichuan province had a minimal impact on the stock market in general, a number of companies have suffered commercially.
Sichuan-based Sichuan Minjiang HydroPower (600131), Emei Shan Tourism Company (000888), Wuliangye (000858), Luzhou Lao Jiao(000568) and Sichuan Changhong (600839) are among the obvious local casualties.
At a national level, several sectors have been hit. These include:
- Insurance: China Life (601628) and Ping An (601318) face higher claims for life and property losses
- Oil: PetroChina (601857) and Sinopec (600028) have suffered damages to Sichuan-based assets and its pipeline network. PetroChina alone has lost around US$244 million in assets.
- Heavy industry: Dongfang Electrical Machinery Company (600875) is perhaps the biggest national-level loser, having been robbed of more than US$1 billion in fixed assets.
While it is not pleasant to consider who may gain from the rebuilding projects that must follow, certain companies will prosper. Infrastructure plays such as An Yang Iron & Steel (600569), Maanshan Iron & Steel (600808) and Hunan Hualing Steeltube & Wire (000932) could be among the biggest beneficiaries.
It has been a quiet month for the Red Dragon Fund, but the steel-makers listed above have attracted our attention.
Despite its losses as a result of the earthquake, our outlook for PetroChina remains bullish, so we won’t get rid of it just yet. As for the other stock in our portfolio, China Unicom (600050), much depends on the impending restructuring of the telecom sector. Announcements appear to be on hold following the earthquake, but we are prepared to be patient.