Shanghai shares/close -- 2 (underlying sentiment cautious)

Hong Kong-Macau Information Investment dealer Tang Jie said the gains in the A-share index had little significance, noting that the flotation of new listings has accelerated in recent days, which will in itself cause the A-share and composite indices to rise.	    While there were few fresh positive leads, there are some underlying concerns which are keeping many investors sidelined, and these include fears that the weakening of external demand will ultimately cause domestic economic activity to slow, he said.	    There are also concerns about the government's plans for the flotation of state shares in listed firms, which could put great pressure on both prices and liquidity, he said, adding that domestic institutions are already likely to have received official notification of these plans.	    There is a rumour that the first phase of the flotations involves the sale of shares in 100 large listed state firms in which the state's holding exceeds 60 pct of total shares, he added.	    "If this rumour proved to be true, the market would definitely undergo a large correction.	    "(Given these underlying concerns), even if there is some scope for share gains, it is quite limited. Both institutions and individuals are generally quite cautious," he said.	    He added that companies known as the "Three Withouts", having issued no state shares, legal-person shares or employee-owned shares, continued to see sharp gains amid the belief that they will not be negatively affected by the state share flotations.	    Tang also noted that B-shares are already trading above 40 times earnings, a level at which few foreign investors would be interested in taking fresh positions.	    Nonetheless, B-shares still hold some upside potential amid continued strong demand from domestic retail investors.	    If China cuts its domestic U.S. dollar interest rates in line with the most recent rate cut in the U.S., this may also force more liquidity into the B-share market from domestic sources, he said.	    One analyst at Xiangcai Securities said the B-shares rebounded strongly from yesterday's declines amid heavy buying of companies planning to issue new shares -- such as Inner Mongolia Yitai Coal and Inner Mongolia Erdos Cashmere -- and companies preparing to carry out asset restructuring.	    One analyst at a domestic securities firm said A-shares were boosted by institution-led gains in Shanghai-based companies, while retail follow-through buying remained limited.	    He said the institutional buying of these firms may be related to rumours that small-cap Shanghai-based companies will make up the first batch of companies to have their state shares floated.	    However, since the government's proposed method of floating state shares is not yet publicly known, it is not clear why institutions might be keen to buy these companies at this stage, he said.	    He added that there is strong interest in poor-quality companies seen undergoing asset restructures, adding that the recent news of the delisting of Shanghai Narcissus appears likely to put local governments under heavier pressure to return their loss-making listed companies to profit.	    Qinghai Securities Tang Gu said the market lacks strong leads, and any market sector which sees strong gains for a few sessions generally undergoes a correction soon afterwards.	    Among Shanghai-based companies, Zhongxi Pharmaceutical rose 1.43 yuan to 15.76 on 4.2 mln shares, while China First Pencil gained 1.92 to 21.16 on 8.9 mln shares and Shanghai Rubber Belt rose 2.96 to 32.9 on 2.2 mln shares.	    Among the "Three Withouts", Xingye Housing shed 0.03 to 18.73 on 9.9 mln shares, while Founder Yanzhong gained 0.64 to 31.59 on 5 mln shares and Shanghai ACE gained 0.13 to 13.71 on 5.1 mln shares.	    Shanghai Petrochemical shed 0.01 to 5.19 on 4 mln shares.	    Among B-shares, Shanghai Chlor-Alkali rose 0.013 usd to 0.873 on 24.4 mln shares, while Shanghai Erfangji gained 0.044 to 0.785 on 12.4 mln shares and Shanghai Lujiazui Finance was up 0.029 at 0.993 on 10.9 mln shares. 	    Zhejiang Southeast Electric Power rose 0.025 to 0.905 on 13.1 mln shares, while Heilongjiang Electric Power gained 0.024 to 0.877 on 7.4 mln shares. 

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