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New initial public offerings (IPOs) and mounting merger and acquisition activities have driven China's stock market higher, despite the government's tightening monetary policy announced on Friday.

Shares in China CAMC Engineering Co Ltd, the first company to go public in China after the government lifted a year-long ban in May, jumped more than four times on the first day of trading.

Shares in the Shenzhen-listed contractor closed at 31.97 yuan (US$3.996), up 332 percent from the IPO price of 7.40 yuan (92.5 US cents), after reaching as high as 50 yuan (US$6.25).

The Shanghai Composite Index gained 0.8 percent to close at 1586.29 points on Monday. It has climbed 37 percent since the beginning of 2006, while the Shenzhen Composite Index yesterday rose 1.3 percent, bringing its gain this year to 48 percent.

"The shares rose unexpectedly high, but it is by no means because CAMC Engineering has an outstanding performance; instead, the fact that it is the first IPO since China lifted the year-long ban triggered investors' speculation on it," Shi Lei, analyst with CITIC China Securities told China Daily.

CAMC shares are now trading at 86 times their 2005 earnings per share, four times the average ratio of the benchmark index, prompting analysts to question potential returns from the investment.

"The shares, with no doubt, will drop in the following days, " said Zhang Qi, an analyst with Shanghai-based Haitong Securities. "But as the share price has been driven so high, it is still profitable to sell them even if they drop in the following days."

The gain is an indicator of demand for new equity as China's biggest companies, including Bank of China (BOC) and Air China, prepare to sell stock on domestic exchanges.

Banking shares, however, saw an 0.41 percent drop against the overall climbing trend as BOC, the country's second-largest lender said that it would sell A shares for as much as 3.15 yuan (39 US cents) apiece.

"BOC's A-share price will become a guide for the price of other domestic banking shares," Shi said. "Comparatively, the shares of other domestic commercial banks are priced a little higher."

The BOC A-share price, while higher than the HK$2.95 (38 US cents) a share paid by Hong Kong investors, is less than the current price of BOC shares. The bank's Hong Kong shares closed at HK$3.375 (43 US cents), equivalent to about 3.47 yuan.

Increasing merger and acquisition activities were another factor driving the market higher, analysts said.

Shares in Sany Corp and Xuzhou Construction Machinery Group (Xugong) continued to rise yesterday after Sany Corp said last week that it wanted to take over Xugong. Shares in Sany Corp closed at 11.59 yuan (US$1.45), up 0.96 percent from Friday, while shares in Xugong-held public company Xugong Science and Technology Co Ltd closed at 5.75 yuan (72 US cents), up 3.05 percent.

The government's tightening monetary policy will surely have an impact on the stock market in the short term, but the impact will not be great; as analysts pointed out, investors anticipated the move.

But Shi warned that a global slump would have a big impact on the domestic market as China's A shares are much more connected with overseas shares listed on world bourses such as the New York Stock Exchange and the Hong Kong exchanges.

(China Daily June 20, 2006)