Chinese stocks are strong?

Following are questions and answers about the stock slide that has made China one of the worst performing markets in the world this year next to Greece.

WHAT TRIGGERED THE SELLOFF?

To cool the red-hot property market,China’s ruling State Council on April 15 unexpectedly announced harsh steps,including raising mortgage rates and down payment requirements,describing sky-high real estate prices as one of the country’s most pressing economic problems.

That spurred a selloff in roughly 120 property shares,including index heavyweights China State Construction Engineering Corp and China Vanke,which have a combined 10-plus percent weighting in China’s total market capitalisation and exert a big pull on the index’s performance. Vanke has tumbled 20 percent since those measures were announced.

Premier Wen Jiabao pledged to rein in property prices in comments over the weekend,even while warning against an economic policy pile-up.

The selloff spread across the broader market in the following weeks as investors fretted that a government clampdown on the property sector could spread to other assets,such as stocks. So far the government has not shown any intention of doing so.

Chinese shares have been in a bear market for the better part of a year,ever since the market’s cyclical peak in August when investors started to fret about the first steps by authorities to tighten liquidity.

WHO IS DRIVING THE SELL-OFF?

Typical of China’s 19-year-old stock market,retail investors — who account for an estimated 70 percent of daily turnover — have been the main force driving the index lower.

China’s modern stock market has yet to establish a culture of investing,and retail investors typically stay in the market only long enough to grab quick profits.

Official statistics regularly published by the China Securities Depository and Clearing Corp show China had a combined 141 million valid domestic A-share trading accounts for the Shanghai and Shenzhen stock exchanges at the end of March.

Retail investors accounted for 99.6 percent of all accounts,although institutions have more funds per account,data shows.

The market has also become susceptible to negative rumours,including talk of an imminent hike in official interest rates that circulated a couple of weeks ago. Speculation that the euro zone debt crisis will cause a slowdown in China’s economy has also played a factor recently.

ARE MARKET FUNDAMENTALS DETERIORATING?

On the face of it,no. Growth is still expected to be 10 percent this year,which will be significantly stronger than the rest of the world. But that will be a slowdown from the first quarter when growth was 11.9 percent.

Many analysts now think China’s economic recovery may be affected by the euro zone debt woes,especially after April data showed a lacklustre performance by China’s exports and industrial output.

If the economy slows much more than expected,it could spoil the likelihood of a bottoming out in Shanghai stocks in the near term and perhaps lead to a further selloff.

On the corporate outlook,the combined earnings of China’s approximately 1,800 listed firms are expected to rise another 20 to 25 percent this year after last year’s 27 percent jump when they recovered from a weak 2008 due to the global crisis.

IS THIS A BUBBLE BURSTING?

Looking at share valuations,the latest plunge is not a bubble bursting but a temporary loss of investor confidence.

Due to the selloff in mid-April,the average price-to-earnings ratio of the Shanghai Composite Index,based on 2010 forecast corporate profits,has fallen to 16 times from 22,according to Reuters calculations.

Many analysts agree that a forward PE multiple of up to 25 for China’s stocks can be regarded as reasonable taking into consideration the country’s economic growth and the potential for the yuan to appreciate sharply in coming years,which will add value to Chinese assets.

WHEN WILL THE SELLOFF END?

Many Chinese analysts forecast the Shanghai Composite Index,now just below 2,600,will hit bottom at 2,500 points,a round number which some superstitious investors believe to be a lucky number as well.

But tracing back to the origins of the latest market rout,the timing will more likely be linked to when the government will stop taking fresh steps to clamp down on property prices.

Despite the steps,property prices in major Chinese cities rose by their fastest clip on record in April and have shown no clear signs of dropping in most cities since the start of May,leaving substantial room for fresh curbs.

Once there are clear signs of property price corrections and a pause in the clampdown,the stock market will likely stabilise.

This scenario is likely to emerge around mid-year.

Afterwards,the solid fundamentals will be poised to prevail,potentially sparking a powerful stock market rebound and mini-bull run — depending on the economic picture and state of global markets then.