20000320China shares under the gun as Taiwan elects Chen

SHANGHAI: Chinese stocks are expected to fall on Monday as skittish investors hedge their bets after Taiwan elected as president the leader of a pro-independence party reviled by Beijing.

But analysts said China will come to the rescue of the markets if the tumbles begin to threaten financial stability.

China's yuan currency was expected to be stable on Monday because of lack of full convertibility and a tight grip by the central bank on the tiny foreign exchange market, dealers said.

Taiwan's president-elect Chen Shui-bian held out an olive branch to mainland China after his election on Saturday. China reacted cautiously to the overture, saying it was "listening to the words, watching the action".

China has long threatened to invade the island, which it considers a breakaway province, if it declared independence.

Investors in China's domestic A share and hard currency B share markets will watch both Taiwan and Hong Kong stocks to gauge their own selling, analysts said.

"I think A shares will fall and B shares will follow," said Mario Zhu, analyst for ABN AMRO Asia Ltd in Shanghai. "Investors will show their worries in the next couple of weeks."

"They don't want to get hurt by panicky sentiment over Taiwan so they may try to wind up their positions for now," he said. "This is a short-term negative."

BAD NEWS FIRST

Chen's election comes on top of other negative news for the A share market, which is aimed at local investors.

China is in the throes of the 1999 corporate reporting season with the results of most listed companies expected to be poor.

Beijing also announced last week that it would allow the listing of a special class of rights shares, sending the markets into a tailspin on fears of a market expansion.

Taiwan investors are among the biggest players in China's B share market and they will be the first to exit if ties between Beijing and Taipei turn for the worse, analysts said.

But China will be able to fall back on powerful tools to arrest a steep market slide, including encouraging domestic funds to buy and announcing new policies to lift prices, analysts said.

"If there is a big fall, the Communist Party may rescue the market," said Zhao Zhengbing, deputy general manager of Jilin Securities in Shenzhen.

"Cross-strait relations will become a factor influencing the stability of China's stock markets in the long-term."

Securities regulators worry sharp falls could endanger China's moves to use the stock market to help list more state firms and reform the ailing sector, analysts said.

Shenzhen's A share index closed up 3.41 percent on Friday and the Shanghai A share index .SSEA rose 3.16 percent on talk Beijing had urged mutual funds and securities firms to support the market before the Taiwan elections.

Shenzhen's B share index soared 6.36 percent while Shanghai's B share index surged 5.10 percent.

Ultimately, investors fear a war of words or even military conflict will hurt Taiwan investment in mainland China, which now stands at more than $40 billion since a relaxation of the ban on indirect trade and economic exchanges a decade ago.

A slowdown in investment could hurt the overall economy and carry over into the stock market, analysts said.

YUAN SEEN STABLE

But the yuan currency was expected to be stable on Monday.

"There's absolutely no threat to the renminbi (yuan) exchange rate," a dealer at a foreign bank in Shanghai. "Even if people want to bring money outside, the capital account is almost watertight."

China also had a war chest of nearly $155 billion in foreign exchange reserves to defend the yuan if needed, he said.

The U.S. dollar was expected to get support on the global foreign exchange market from Chen's election as investors seek a safe haven amid worries of heightened tension between China and Taiwan, dealers said.-Reuters