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TheStreet Open House

Shanghai Shares Take Hit

BEIJING -- Mainland China's flagship Shanghai bourse, which has seen outsized gains in 2006, took a drubbing Wednesday. The Shanghai Composite Index cratered 5.3% to 1590.

One mainland analyst blamed the Shanghai Comp's fall on profit-taking, given the index had shot up 45% year to date. Investors may also be preparing to reallocate funds into Bank of China, which is gearing up for an IPO in Shanghai following its blowout Hong Kong debut.

In Hong Kong, the Hang Seng Index also fell, closing down 1% to 15,817.

China shares were mostly down in Tuesday New York trading. Baidu (BIDY) once again proved an exception, rising 7.9% to $89.85 -- possibly gaining on yesterday's news of rival Google's continuing service problems in China.

Wireless value-added service provider Tom Online (TOMO) was off 3.9% to $20 and Linktone (LTON - Get Report) fell 1.5% to $6.60.

The duo, along with other wireless plays, have lately come under pressure on talk that leading cell-phone operator China Mobile (CHL) will undertake a sector clean-up. Wireless value-added services let consumers use cell phones to send short messages, download ring tones, play games and access the Web.

On June 2, the Ministry of Information Industry, China's telecom regulator, said it would start cracking down on abusive fees in the short message service market. So far, nothing else has been formally announced, but rumors have circulated that China Mobile will embark on a self-policing drive to fend off more intervention.

Investors worry that broader regulatory moves might further crimp business, although the bigger value-added services companies have already curbed some of their more aggressive practices.

The problem stems from the gold-rush mentality in China's mobile-phone arena. Over the past five years, the nation's two mobile operators have handed out over 3,000 licenses to service providers, notes ThinkEquity analyst Michael Zhang. But the market remains highly fragmented. Cutthroat competition prompted a host of dodgy practices like spamming, price traps and other scam-ish behavior.

In fact, a crackdown on such dubious behavior might actually boost the biggest, most-credible value-added service providers, even if the near-term effect could be a little messy. "We expect the small and private service providers will be driven out of the market more quickly, which will ultimately give an advantage to the large service providers," said Susquehanna analyst Ming Zhao in a note.

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