Beware Beijing's hand in the stock
market By Olivia Chung
HONG KONG - The recent stumbles in the
A-share markets in mainland China have not only
made investors and speculators lose money, but
have reminded information-sensitive small
investors of the long-standing problem with
China's fledgling stock markets - they are still
largely guided by government policy.
The
experience of Yu Hanshen, an investor living in
Guangzhou, has not been a happy one. Although last
year he recaptured the losses in the investment he
made at the end of 2000, he has lost
money again in the past
weeks.
Yu put more than 60,000 yuan (then
about US$7,200) into stocks in late 2000. A few
months later, the government pressed ahead with
the sale of state-owned shares on the markets, so
investors dumped the shares on fears of
oversupply, pushing the market value of Yu's
stocks down by more than half.
Having seen
the market plunge to record lows in 2005, Yu put
more money into the stocks again and finally
recouped his earlier losses. He reaped 130,000
yuan (nearly $15,700) - more than doubling his
original investment.
Like many other
investors, he started buying the shares of
companies reporting losses in last two consecutive
years based on side-street news or hearsay, as he
thought such shares would rise like a rocket once
the market started to turn around.
He is
still waiting for his "rockets" to blast off. The
government put a damper on things by tripling a
tax on share trading, which will take out about
500 billion yuan ($66 billion) this year, equal to
the combined profit of all listed companies last
year. The Shanghai Composite Index dropped about
13% from its peak in the week after May 29, when
the government tripled the stamp duty.
"That's why we are so angry about the
stock market here; it's a 'policy market' - the
government keeps interfering in the stock market,
leading to the continuing loss of confidence by
investors," Yu said. "What angers us the most are
senior government officials who go back on their
word. They had denied reports that the stamp duty
would be raised just a few days before the action
was taken."
During the second week after
the sudden rise in the stamp duty on share
trading, the stock market rebounded briefly. But
in the wake of renewed confidence in the market,
the State Council said on June 13 that the
government would introduce further policy
initiatives such as financial and tax measures to
control excess liquidity, signaling imminent
tightening measures to temper economic growth.
The Shanghai Composite Index tumbled more
than 15% between May 30 and June 29 as worries
spread among investors. The worries included a
possible interest-rate hike after the National
Bureau of Statistics said fixed-asset investment
jumped 25.9% to 3.2 trillion yuan in the first
five months from the same period last year,
surpassing a market consensus of 25.4%.
Other concerns include sales of the
government holdings in listed companies,
speeded-up approvals of initial public offerings
(IPOs), the planned issuance of 1.55 trillion yuan
in special treasury bonds to buy out $200 billion
from the foreign-exchange reserves for overseas
investment, wider investment avenues for qualified
domestic institutional investors (QDII) and the
likely reduction or cancellation of the tax on
interest from saving deposits, expected to curb
excessive liquidity in the market. All of these
are bearish news for the stock markets.
Although the sales of state-owned shares
have been well under way since April 2005, with
97% of listed companies already having completed
or in the process of completing the reform, there
are about 800 billion yuan in non-tradable shares
that are expected to be converted to tradable
shares this year. Only about 20% of the total have
been released in the first six months.
The
China Securities Regulatory Commission said on
June 20 that eligible financial firms would get
licenses as qualified domestic institutional
investors starting July 5. As well, the CSRC was
quoted recently by China Daily as saying the
return of red-chip companies - mainland firms that
are incorporated and listed overseas - to the
domestic stock market could be within the next two
months.
According to China Finance
Information, which claims to be the country's No 1
financial media network, many investors incurred
significant losses in June, with losses up to
about 70%. Previously most of them made
significant profits in the first five months of
this year.
According to its survey on
retail investors, which was finished on June 29,
about 24.6% of respondents made a profit, 8% broke
even and 67.6% lost money in June.
The
report said the significant loss was caused by the
rocky stock market and the approximately 400,000
who opened new A-share accounts each day in April
and May. But the number of new A-share accounts
dwindled to about 63,000 last Friday.
Hu
Weitao, chief investment officer of Valuefinder
Investment Management Co in Shenzhen, expected the
stock market to become volatile in the coming
weeks after the market fell by more than 15% since
May 30, because of the rapid rise in IPO
approvals, QDII expansion and red chips.
"News including possible interest-rate
hikes, the issuance of special bonds and the QDII
channeling money out of the domestic market will
still affect the market sentiment here," he said.
Having seen the stock market become
volatile, the Ministry of Finance said on July 4
that the 1.55 trillion yuan special bond issue is
not targeted at the stock market and will not
siphon the existing liquidity out of it.
"China's stock market is a policy market,"
Yu said. "That means, on the one hand, senior
government officials will cool the equity market
when it seems overheated; on the other, the
government will talk up the stock market when its
policies make the market volatile. These
government moves, however, will give the
impression of uncertainty of policies, which will
finally make the market volatile.
"Maybe
the government is afraid that the stock frenzy
will one day lead to social instability, but the
problem of the country's stock market is not the
ups and downs, but the irregularities such as
underground funds. And many of the stocks have
irregular trading patterns and a poor track record
of dividend payouts, which really harms the
interests of investors. What the government should
do is solve the above problems, instead of
intervening in the market directly," Yu said.
"Otherwise, the market will sooner or
later crash, which is what happened in 1996 when
the government tried to cool the sizzling stock
market by using the official mouthpiece, a
People's Daily's editorial, to warn against
speculation, which ended badly with a stock-market
crash," he said.
Olivia Chung is
a senior Asia Times Online reporter.
(Copyright 2007 Asia Times Online Ltd. All
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