Shanghai index roars ahead

Rising interest rates and fears for the fate of the world's stock markets seem to have no braking effect on the Shanghai Composite Index, which catapulted through the psychologically crucial 5,000-point barrier on August 22nd and was still there yesterday.

This marked the fourth day in a row that the index closed at record highs, and came in the same week as an interest rate increase - on Tuesday, the People's Bank of China raised the one-year benchmark deposit rate by 27 basis points to 3.6 per cent and the one-year lending rate by 18 basis points to 7.02 per cent.

But high levels of liquidity in the Chinese share market allowed the indices to shrug off the rate rise.

China is awash in funds flowing into the country, driven by the expectation of currency appreciation, which has been given a further boost by the narrowing of the interest rate gap between the US and China.

The Shanghai Composite Index closed trading on Thursday at 5,032.49 points, which is a rise of 52.42 points or 1.05 per cent on the previous day's close.

The CSI 300, which is the underlying indicator of the upcoming index futures, has also breached 5,000 points.

Meanwhile, the Shenzhen Component Index, which tracks the smaller Shenzhen Stock Exchange, ended the day yesterday at 17,639.23, up 307.24 points or 1.77 per cent. The index is up nearly 150 per cent so far this year.

"Plentiful liquidity is continuing to drive up the stock market. A small adjustment to the interest rate may not be able to solve the problem of excessive investment and liquidity in China's economy," was how a report from Orient Securities put it.

"The negative interest rate may continue to lure investors to move money to the stock market. Blue-chip stocks, which were largely held by mutual funds, are expected to go up," said the report.

Other market players say 5,000 points was set as a target by many institutional investors, so there could be some volatility at that level, although anyone involved in the China market is probably used to volatility at this stage.

The government in Beijing, fearful of political fallout if there is a meltdown on the stock market and a lot of small investors lose all their savings, is trying to cool investor ardour for shares, but seemingly to little avail.

The government is also keeping a fearful eye on inflation, which rose sharply to 5.6 per cent in July year-on-year, the highest rate in 10 years.

On August 20th, the State Administration for Foreign Exchange said that for the first time, mainland Chinese were allowed to invest directly in Hong Kong stocks, which analysts said was an attempt to take funds out of China and put them into Hong Kong.

It's a significant step in freeing up capital markets in China, but it will not be enough to keep the pressure off the yuan's exchange rate. Where China once jealously accumulated precious foreign currency, it now has reserves of over €1 trillion and counting.