Thursday, March 22, 2007

ASX quivers after Shanghai sneeze

The Australia Securities Exchange (ASX) is still nervously recovering from the recent market plunge which created much congestion on its website. On February 28, the benchmark ASX 200 Index fell 161.3 points, which represents 2.7% of its total value, the market's biggest one-day fall in over five years. A record 359,084 trades took place on the day with $9.1 billion worth of shares changing hands.

The fall was caused by a collapse on the Shanghai market which was spooked by rumours that the Chinese government would introduce a capital gains tax and restrict foreign investment. Shanghai fell 9% as a result and these falls were replicated in Hong Kong, New York and across the world. It was the largest single Wall St fall since 9/11. Here in Australia $68 billion in value was wiped from the market with resource stocks most dependent on China's surging economy hit the hardest.

Stock markets worldwide have been jittery ever since China has dazzled the world in recent years with year-on-year economic growth of 10% and industry growth of 23%. This was reflected in the rise of the Shanghai bourse of 130% last year. But many felt that a correction was inevitable. ABN Amro’s chief economist Michael Knox believed that much of Shanghai’s rise is funded by debt and margin lending. He warned “the stockmarket is a place of risk and people had fallen asleep about that sense of risk and now they've had quite a shock awakening.”

But barely three weeks later Shanghai has recouped all its losses. Yesterday the Shanghai composite index rose 25.19 points to close at 3,057.38, an all-time high. Many investors are now saying the huge sell off last month was merely a temporary setback in a galloping bull market. The Chinese equity market is not in the same league at its rampant economy and is only the fifth largest in the world. Cao Zitao, an analyst at Guotai Junan Securities in Shanghai likes the look of the market in the long run. "Since the economy is doing well, there's no doubt the stock market will continue to grow over the next year or two,” he said.

This is good news for the Australian exchange which signed a Memorandum of Understanding (MOU) in 2002/2003 with China’s two biggest exchanges at Shanghai and Shenzen. Under the MOU, the bourses agreed to co-operate in exchange programs, keep each other informed of major policy changes in the markets, host secondment of personnel and exchange information about each other’s markets.

It is one of many international agreements the ASX is now involved in. The exchange is affiliated to three world governing bodies. Firstly, it is a member of the World Federation of Exchanges (WFE) which contains 54 of the world’s largest exchanges. Its stated purpose is to “facilitate the representation, development of organized and regulated markets, and to meet the needs of evolving capital markets in the best interest of their users”. According to its statistics, the ASX had a domestic market capitalisation of about $US0.8 trillion in 2005 which makes it the 11th largest exchange in the world.

The ASX also belongs to the Asian and Oceanian Stock Exchanges Federation (AOSEF) which contains the bourses of Australia, Hong Kong, Jakarta, Korea, Malaysia, India, Shanghai, New Zealand, Osaka, Philippines, Thailand and Tokyo. The ASX has 2,100 listed companies – only Tokyo has more and Australia has twice as many as the next biggest, the Hang Seng. But the Hong Kong market is still $US 1 billion bigger overall.

The third organisation is IOSCO – the International Organisation of Securities Commissions which is the international standard setting body. It regulates the markets, promotes the exchange of information, establishes standards and provides mutual assistance to promote market integrity.

Market integrity is a strong point for the ASX which was formed in 1987 by legislation. It was formed by an amalgamation of six independent stock exchanges that formerly operated in the state capital cities. Each of those exchanges had a history of share trading dating back to the 19th century.

The modern ASX is reliant on its web presence which is one of Australia’s most popular financial websites with an average of 24 million page impressions per month. It is a hugely dense multi-purpose environment which provides investors with a wealth of market information including 20-minute delayed prices, company announcements in real-time, and a wide range of education classes and simulations.

According to ASX's 2006 annual report, listed company announcements are available on the website within minutes of release and are a key source of information for investors. But it remains to be tested on a severe runoff despite upgrading its integrated trading system last year. It now has the capacity to handle a million trades a day but remains vulnerable to another market meltdown.

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