Rollercoaster China stock market has more room to drop – analysts

SHANGHAI (AFP) – Fasten your seat belts investors: China's volatile stocks still have room to drop, but analysts say keeping the rollercoaster on the tracks will depend on how the government manages its eventual exit from the market.

An 8.48 percent plunge on Monday – the biggest in eight years – renewed fears about the government's management and the health of the underlying economy, in which growth has already slowed to levels unseen since the global financial crisis.

In moves widely criticized as antimarket, the government has intervened by barring some investors from selling, setting up a war chest to buy stocks and threatening to arrest those who engage in short-selling– a bet prices will go lower.

But after an exuberant, governmentengineered 150 percent rise over the 12 months to mid-June when the market peaked, and a 29 percent correction between then and Tuesday, analysts said prices can go still lower.

''A big rebound seems unlikely now,'' Zhang Gang, an analyst from Central China Securities, told AFP. He expects the Shanghai market to test support at 3,500 points and then at 3,200.

The benchmark Shanghai Composite Index was down 0.21 percent at 3,655.27 by the break Wednesday. ''The (government) measures are generally on the right path, but it takes time for the market to recognize it,'' Zhang said. ''After the risk is resolved, the market will perform better next year.''

The key will be how the government manages divestment of its newly acquired stock holdings without spooking tens of millions of ''mom and pop'' investors, the main force in China's markets who trade on rumor and speculation.

Worries the government is preparing to exit the market, despite repeated denials including the latest on Monday, was the trigger for the biggest fall since February 2007.

''I do think they will reduce intervention which is what the market is afraid of these days,'' Steve Yang, a strategist at UBS Group in Shanghai, told Bloomberg News.

''The process will be very long. They do not need to rush to sell their positions in the short term.''

Other negative factors are out of the control of securities regulators: an expected US interest rate hike affecting global activity and China's own slowing growth – the economy expanded 7.0 percent in the second quarter, a far cry from double-digit increases of the past.

But exactly where the bottom might be, nobody knows.

Gu Luxian, a former bank employee who trades stocks full-time after leaving his job, plans to return to the market after it falls at least another 20 percent.