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Airline Stocks Wobble on Market Rumors

05-06 16:55 Caijing

Share prices for China Eastern and Air China retreated on the Shanghai bourse after officials denied rumors about imminent mergers with other carriers.

By staff reporter Wang Zhen

The Shanghai Composite Index closed modestly lower Tuesday at 3733.50, slipping 27 points from Monday's finish, after official denials silenced speculation about possible airline mergers in the near future.

Airline stocks played a lead role in trading as share prices in the sector retreated an average 5 percent Tuesday, following a 10 percent average advance Monday based on market rumors, including whispers that Singapore Airlines would acquire China Eastern Airlines (SHSE: 600115).

China Eastern lost more than 4 percent Tuesday to 11.30 yuan, although the price was still 6 percent higher than its pre-rumor value.

"Monday's market rumors sent the airline stocks high," said analyst Du Haoming of Shenyin Wanguo Securities. "But the market adjusted itself today after the rumors broke."

China Eastern did not rule out a potential merger but said the matter would be postponed until after the Olympics. For now, the airline said, the company plans to focus on serving customers during the Olympics.

Another incentive for airline stock traders was a rumor that Air China (SHSE: 601111) would acquire Shanghai Airlines (SHSE: 600591). On Tuesday, speaking with Caijing, Air China's board secretary Huang Bin rejected that speculation. Meanwhile, Air China shares lost 5.21 percent to close at 15.46 yuan Tuesday following an almost 10 percent advance Monday.

Du said that, for now, cooperation between Air China and Shanghai Airlines had not reached a mature stage for equity investment.

Soaring global fuel prices have squeezed airline profits so far this year. Domestic fuel prices have been capped by the state on inflation concerns, but airlines inevitably face cost pressures when they fill up their aircraft overseas.

Xue Lan, China equity chief at Citigroup, said the aviation sector as well as the shipping container sector would be highly sensitive to the weakening economy.

However, central bank Chairman Zhou Xiaochuan said Monday that consumer price inflation in the second quarter was expected to ease, possibly creating a more encouraging environment for the market.

Investors were also waiting for China's macroeconomic statistics for April to be released Friday. According to the government statistics bureau, CPI is expected to fall to 7.5 percent from 8 percent. Nevertheless, the chief China economist for Goldman Sachs, Liang Kong, said CPI would continue to be high.

1 yuan = 14 U.S. cents

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