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China moves to cage its rampaging
bears
BEIJING - With the
bear roaring in the bourses for three-and-a-half
years, the biggest concern for China's 70
million-odd stock investors is whether the coming
year will see a revival of the market's fortunes.
Performance so far this year has been disastrous,
with the Shanghai benchmark dropping to an almost
six-year low on Monday and the Shenzhen Composite
Index, which tracks the smaller of the two Chinese
markets, hitting its lowest since 1997. The
benchmarks were incidentally two of the worst
performers worldwide last year, partly on concern
that a resumption of fresh offers will increase
the supply of shares and reduce the value of
current stocks.
To douse the fire, Xie
Geng, director of the Market Supervision
Department of China Securities Regulatory
Commission (CSRC), the government watchdog for the
securities and futures industry, announced that
the authorities might intervene to restore the
markets. Clearly, the securities authorities are
reluctant to see a further slide in share prices,
which have fallen by more than 40% since mid-2001.
The authorities earlier took a series of
measures to rally the market when the Shanghai
Stock Exchange Composite Index fell to nearly
1,300 points, widely considered the policy bottom.
But on Monday, the 1,300-point psychological
threshold was easily broken, with the index
hitting a new low of 1,215 points, triggered
directly by the decision of the stock market
regulator to resume issue of initial public
offerings (IPO), which had been suspended for four
months.
A more deep-rooted reason is
probably the expected full negotiation of all
shares of listed companies. In China, shares of
listed companies are divided into negotiable
shares quoted for trading on stock exchanges, and
non-negotiable shares usually held by the state.
The quantity of the latter is much bigger than
that of the former. Full negotiation is the
fundamental reason for the 40% plunge since
mid-2001. The government is now making every
effort to solve the issue, but so far no definite
solution has been found.
Even securities
analysts and experts who used to offer annual
predictions of the market's direction in the year
appear lost. "I do not feel optimistic about this
year's market performance," said Zhu Jianfang, an
analyst with China Securities Co. "We have yet to
find something that is strong enough to
consistently drive up the indices." Cao Fengqi,
director of the Finance and Securities Research
Institute at Peking University, also found it
difficult to predict market trends. "I am neither
a pessimist nor an optimist. I still see some hope
with the bourses, with the biggest one coming from
the robust Chinese economy, but it will not be
easy for this to become a reality."
Then
what exactly is wrong with China's stock market?
It is not a result of insufficient government
support. On the contrary, with the issuing of a
nine-point guideline document by the State Council
to support the development of the capital market
last February, the government made a number of
pledges to reform the bourses more than ever
before.
Special panels were established in
relevant departments throughout 2004 to implement
the proposed reforms. A new coordination channel
between three financial regulatory bodies was put
in place. The small and medium-sized enterprises
board was opened in Shenzhen to facilitate the
listing of smaller companies. The stock issuing
system was upgraded to ensure that public
offerings reached more reasonable prices.
Securities companies were allowed to issue bonds
and increase short-term financing with banks. And
fund companies had their mutual fund products
approved much faster and easier than previously.
Insurance and pension funds got wider
access to stock investment, providing a fresh
source of funds. And investors' deposits were
better protected. All of last year's reforms seem
to be positive news that should have made the
stock market turn around. But apart from
short-lived rebounds, the market gave a cold
shoulder to the stimuli and relentlessly headed
south.
Has the stock market simply lost
its attraction to investors? The root cause of
ailing investment confidence is that there is very
little or even no return for investors, said Cao.
For more than a decade, many listed companies have
regarded the bourses as cash cows and did not care
about investor sentiment - rarely paying dividends
and often providing fake information. Cao pointed
out that the market remains weak as the mechanism
for protecting investors' interests has yet to be
fully established.
It has been suggested
that the role of the market be defined as a venue
for investment, rather than a place to raise
funds. And listed companies should create
fortunes, not just for themselves, but for the
public investors too. Regulators have started to
make progress on this. However, the biggest
obstacle confronting the implementation of the
reform plans is the bourses' split share
structure. The fact that about two-thirds of the
shares of domestically listed companies are
non-tradable and lying in the hands of the state
has left very little room for public investors to
improve their situation. The existence of these
non-tradable shares, a result of the planned
economy, has offered the actual controllers of the
listed companies more of an advantage than public
investors in terms of the disposal of the money
raised from the stock market.
Realizing
these flaws in the system, regulators are looking
for ways to gradually reduce and float these
shares, but it is hard to find a solution that
will please everyone. This reform to change the
market structure and fundamentals will prove to be
long-term and arduous. The State Council
guidelines issued last year have corrected some
wrong perceptions about the role of the stock
market and mapped out new prospects, so investors
are a little more hopeful, said Li Qingyuan,
director of the research center of the CSRC.
But implementing the guidelines is another
matter, she said. "We have to arrange all reform
plans in the order of their priority. We have to
figure out what is most important and has to be
solved first." The solution of the irrational
share structure is obviously top priority, and the
interests of public investors have to be keenly
protected, she said.
Li, claiming that she
was only giving her personal opinion and not
speaking on behalf of the regulator, made these
remarks at the Ninth China Capital Market Forum
held in Beijing last Saturday. She made similar
remarks a year ago at the same forum, but
unfortunately not much has changed since then. It
is doubtful if some breakthroughs will be made
this year.
Regulators, however, have hoped
the new year could be a new starting point. "We
have to see the challenges and the opportunities,"
Shang Fulin, chairman of the CSRC, said at the
commission's annual work conference earlier this
month. The strong Chinese economy and its
integration with the global economy require a
faster development of the capital market and more
foreign investors investing here. He said the
commission would focus this year on the market's
infrastructure construction, from improving
quality of the listed companies, enriching product
diversity to better protecting investors'
interests.
Expected tax reduction,
withdrawal of more poor-performing listed
companies and securities houses and the
establishment of a securities investor protection
fund may bring better times to the stock market.
But many still doubt whether these measures will
really rescue the bourses and investment
sentiment. The systemic flaws in the stock market
have to be repaired to revive the market, said Wu
Xiaoqiu, director of the Finance and Securities
Institute at Renmin University of China. It will
cost a lot of money and energy, but it has to be
done, or the system will fail, he said.
(Asia Pulse/XIC) |
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