26 January 2009

Year of the rat sees Chinese stock prices fall 65%

Martin Ellis, chief economist at Clerical Medical, said:
"The Year of the Rat proved to be a turbulent one for the Chinese stockmarket with stock prices falling by 65% compared to a 43% decline for the average across the major global markets."

"China was still one of the few major global stockmarkets to emerge from 2008 with equity prices higher than a decade ago, suggesting that it remains one of the most attractive emerging markets for investors."

Key findings

Chinese stock prices in 2008

Chinese equity prices down 65%¹ in Year of the Rat
With China about to enter the Year of the Ox in the Chinese calendar, new research by Clerical Medical shows that stock prices in China in 2008 fell by more than double the decline in UK equity prices. Over the past year, the Shanghai Index has declined by 65% from an index value of 5,521 on 31st December 2007 to 1,912 on 31st December 2008. Over the same period, the FTSE100 fell by 31% from 6,457 to 4,434.

¹_{Based on the average end month index values across global stockmarkets}

Chinese stock prices hit by crisis of confidence
The drop in Chinese stock prices was more marked than across any of the other major global markets². Fears over the impact of a prolonged US recession on the Chinese economy led to a decline in investor confidence with sales of consumer goods, particularly to the US, a key driver of Chinese growth. Additionally, rising inflation and tighter government controls contributed to the sharp fall in Chinese equity prices.

Stock prices in China underperform major global stockmarkets² in 2008
The drop in Chinese stock prices over the past year (-65%) exceeded the decline in all the other major stockmarkets across the world and was significantly greater than the average fall of 43%. Hong Kong recorded the second largest fall (-48%), followed by Australia and France (both -43%).

Equity prices in China decline faster than the East Asian³ regional average
Over the past year, stock prices in China (-65%) have fallen by more than their neighbouring countries and by more than the regional average² of -49%. India recorded the second sharpest decline (-55%) in the region, followed by Indonesia (-51%).

Chinese stock prices 1998-2008

Chinese stock prices have risen by 57%¹ over the past decade
Between 1998 and 2008 the Chinese Shanghai Index rose by 57% from an index value of 1,220 on 31st December 1998 to 1,912 on 31st December 2008. In contrast, the FTSE100 fell by 25% over the same period.

China outperforming the major global stockmarkets²
The stockmarket in China recorded the highest rate of growth among the major global stock markets over the past decade. Furthermore, China was one of only three of the major global stockmarkets² to record an increase in equity prices between 1998 and 2008. Hong Kong (43%) and Australia (30%) were the only other major stockmarkets to see equity price growth over the same period. At the other end of the scale, Japanese stock prices fell by 36% over the decade to the end of 2008, while UK equity prices have fallen by a quarter over the same period.

Chinese stock prices have, however, underperformed the regional average
Equity prices across East Asia³ have risen by an average of 83% over the decade to 2008. The top performing stock markets in the region were India (267%) and Indonesia (241%), both more than four times the stock price growth recorded in China (57%). The Indian stockmarket has benefited from its status as one of the world's fastest growing economies, while Indonesia benefited from the recent commodity boom. In contrast, equity prices in Taiwan (-28%) and the Philippines (-5%) fell between 1998 and 2008.

The following is a list of the 18 new Clerical Medical funds, their fund managers and the fund management company they work for. These are not external fund links.

Table 1: China & Major Global Stockmarkets

Country	Dec-98	Dec-07	Dec-08	1 year	10 year	10yrs %pa
China	1220	5521	1912	-65%	57%	4.6%
Hong Kong	10049	27813	14387	-48%	43%	3.7%
Australia	2813	6421	3659	-43%	30%	2.7%
France	3943	5614	3218	-43%	-18%	-2.0%
Japan	13842	15308	8860	-42%	-36%	-4.4%
Germany	5002	8057	4810	-40%	-4%	-0.4%
USA	9181	13265	8776	-34%	-4%	-0.5%
UK	5883	6457	4434	-31%	-25%	-2.8%
Average	-	-	-	-43.4%	5.3%	0.1%

Source: Datastream

Table 2: China & East Asian Region

Country	Dec-98	Dec-07	Dec-08	1 year	10 year	10yrs %pa
China	1220	5521	1912	-65%	57%	4.6%
India	1359	11154	4988	-55%	267%	13.9%
Indonesia	398	2746	1355	-51%	241%	13%
Philippines	1969	3622	1873	-48%	-5%	-0.5%
Hong Kong	10049	27813	14387	-48%	43%	3.7%
Thailand	356	858	450	-48%	26%	2.4%
Taiwan	6418	8506	4591	-46%	-28%	-3.3%
South Korea	562	1897	1124	-41%	100%	7.2%
Malaysia	586	1445	877	-39%	50%	4.1%
Average	-	-	-	-49%	83.3%	5.0%

Source: Datastream

EDITORS' NOTES:

2. International indices have been measured in local currency terms and assume a fully hedged currency exposure.

3. Data is measured as at end month index value. Price indices rather than total return indices have been used for this analysis to obtain a complete data set.

"This report is prepared from information that we believe is collated with care, however, it is only intended to highlight issues and it is not intended to be comprehensive. We reserve the right to vary our methodology and to edit or discontinue/ withdraw this, or any other report. Any use of this report for an individual's own or third party commercial purposes is done entirely at the risk of the person making such use and solely the responsibility of the person or persons making such reliance. © HBOS plc all rights reserved 2009".

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