Economic Observer Online
By Peng You (彭友)
Mar 14, 2012
Translated by Pang Lei
Original Articles: [Chinese]

The government's intention to stick with real estate controls has been cited as a possible cause of a significant and unexpected fall on the Chinese stock market this
afternoon.

Trading on China's two main domestic stock markets was calm this morning, with both of the major stock indexes basically holding steady after opening a little up on yesterday's close. However, in afternoon trading, both indexes plunged sharply with the Shanghai Composite Index closing below the 2,400 mark at 2391.23 points, down 2.63 percent, and the Shenzhen Component Index finishing at 10,094.89 points, down 3.19 percent.

This was the biggest single-day fall of the Shanghai index since Nov. 30 last year and formally marks the conclusion of the steady-to-rising trend that often accompanies the annual meeting of China's top two political bodies, often referred to as the "Two Sessions."

Many investors were surprised by the sudden drop.

During the midday trading break, China's Premier Wen Jiabao continued to take questions from journalists at a press conference that went from about 11am to 2pm.

In response to a question about housing prices, Premier Wen said that comments like "the more controls, the higher the prices" and "policies don't make it past the gates of Zhongnanhai" (referring to the area in central Beijing where China's leaders work and often live) made him very upset.

The premier noted that the housing market is connected to the fiscal, financial, land and business policies of the government, and involves the interests of both the central and local governments, especially to the sizable amounts of revenue that local governments can earn from leasing land. The premier added that the regulations also impact on the interests of financial and real estate companies and that the reforms have met a great deal of resistance.

However, Wen also stressed that prices are still very far from reasonable and said that the existing controls will not be relaxed.

When afternoon trading began, the reaction of real estate stocks was at first relatively calm, with no noticeable sell off,  but by 1:30pm, the market suddenly began a rapid decline.

Turnover on the Shanghai board totaled 170.7 billion yuan for the day. The last time the Shanghai exchange registered such a large daily turnover was in March 2011, when the market began to experience a near year-long fall that saw the index fall by close to 50 percent from its peak of 3,067 points.

Since the turn of the year, the Shanghai index has witnessed slow but sizable gains, climbing from a base of 2,132 points.

Yang Tao (扬韬), a well-known private investor from Shanghai, said that the sudden drop showed that investors were a little disappointed with both the press conference and the "Two Sessions" in general.

It seems that quite a number of market participants are interpreting today's sudden fall as a reflection of a kind of pessimistic atmosphere, one that goes beyond the activities of the stock market.