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2 SUN
WUKONG Politicizing
China's stock market bubble By
Wu Zhong, China Editor
holdings,
which are not traded on the markets. On that day,
turnover on both bourses was more than 337.33
billion yuan. In other words, in that single day
about 6% of the tradable shares changed hands. If
all shares were tradable, this percentage would be
1.97%.
By comparison, on that day,
capitalization of the Hong Kong Stock Exchange
totaled HK$14.75 trillion (US$1.89 trillion).
Turnover was more than HK$54.65 billion,
accounting for 0.37% of
the
total capitalization as all shares are tradable.
Hence an immediate measure to increase the
supply of shares is for the government to reduce
its holdings in listed state firms. In fact there
is no need for the government to retain a 70%
stake in a listed state firm - a 51% stake ensures
it has control. The Chinese government is now
reportedly drafting rules for the disposal of
state holdings.
Another way to increase
supply is to speed up initial public offerings
(IPOs) by qualified enterprises. It is said that
there are some 100,000 state-owned enterprises
that are eligible to go public.
The CSRC
has suspended IPOs in past years because of
bearish markets. But times have changed, and it is
now a good time for the regulator to speed up the
processing of IPO applications. And there are also
privately run and foreign-invested enterprises
that could launch IPOs. It may not be a
coincidence that the CSRC last week said it would
encourage small and medium-sized enterprises to
raise money in the stock markets. In addition, the
regulator could ease restrictions to allow listed
companies to issue convertible bonds.
A
third way to increase share supply is to speed up
the "return" to the A-share markets by Chinese
enterprises listed in overseas markets as H-share
and red-chip companies. There is no regulatory
obstacle for an H-share company to issue A shares
back home, because it is incorporated in mainland
China. But to allow a red-chip company to make an
A-share public offering, the CSRC has to ease its
restrictions on foreign companies selling shares
on the Chinese stock markets, for a red-chip
company is incorporated overseas and as such is
regarded as a foreign firm despite the fact that
it is a Chinese enterprise that concentrates on
mainland operations.
Again, it may not be
a coincidence that, shortly after Wen made his
pledge, the mainland media reported that the CSRC
was mulling the "return" of big-cap H-share and
red-chip companies in the latter half of this
year.
On May 18, two days after Wen's
Shanghai speech, the CSRC decided to "encourage
and support six large state enterprises listed
overseas as H-share and red-chip companies to come
back to the A-share markets in the latter half of
this year", reported the 21st Century Business
Herald, a leading business newspaper based in
Guangzhou.
The six are H-share and
red-chip firms - PetroChina, China National
Offshore Oil Corp (CNOOC), China Mobile, China
Telecom, China Construction Bank, and Shenhua
Energy.
The CSRC will file a formal
proposal next month to the State Council, China's
cabinet, on speeding up the return of overseas
listed H-share and big-cap state-owned enterprises
to the home markets, the report said, quoting an
unnamed CSRC official.
If the current ban
on overseas-registered companies from going public
on the A-share markets is lifted to facilitate the
return of red chips, other foreign companies could
also launch A-share IPOs. No wonder a Shanghai
Stock Exchange official publicly said the bourse
wanted to persuade foreign giants such as HSBC to
sell A shares in Shanghai.
On the other
hand, the Chinese government may also divert some
"hot money" to overseas markets, particularly the
Hong Kong market, so as to reduce demand at home.
And in fact the government may be quietly doing
so.
A recent report in a Beijing newspaper
said mainland residents could legally trade in
Hong Kong shares. It also explained to readers how
to do so. In addition, to invest through the
so-called QDII (qualified domestic institutional
investor) program, individuals can directly buy
and sell Hong Kong shares through two channels.
One is to open an account with a mainland
representative office of a Hong Kong securities
brokerage, and the other is to transfer their
money directly to Hong Kong.
It reminded
readers that "the government has eased its
foreign-exchange control, and an individual could
transfer funds equivalent to US$50,000 out of the
mainland per year". H shares in Hong Kong are
worth buying because they are much cheaper than
their A-share equivalents, the report said as if
trying to persuade investors to take immediate
action.
Certainly this is bullish news for
Hong Kong, and savvy investors in that market are
surely prepared to cash in on such a golden
opportunity.
Increasing supply and
reducing demand are the right moves in a market
dominated by buyers. However, the behavior of a
stock market may not be exactly the same as a
commodity market's. Lessons from other markets
have shown that well-intentioned measures taken by
the government often fail to prevent stock-market
bubbles from bursting.
One thing is for
certain, Premier Wen's reputation and popularity
will be damaged if the market crashes during the
17th Party Congress. But it might be going too far
to say that his political career will be
destroyed.
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