SUN
WUKONG China shares drive may drown a
golden goose By Wu Zhong, China
Editor
HONG KONG - Despite some worries
about the negative effects on the country's
development, China's economic planners still see
excess liquidity, or too much money in
circulation, as "Public Enemy No 1" in their
efforts to rein in the overheating economy.
Accordingly, financial regulators are
sparing no effort to help squeeze money out of the
system. In addition to tightening monetary policy,
the country's fledgling A-share market is seen as
an important instrument to help absorb funds from
society. Therefore, despite the current bearish
sentiments in the stock market, financial
regulators seem determined to go ahead with a plan
to speed up market expansion.
On February
19, the People's Bank of China (PBoC) publicized on
its
website the 11th Five-Year Plan for Development
and Reform of Financial Industries (2006 – 2010)
jointly worked out by the PBoC, the China Banking
Regulatory Commission (CBRC), China Securities
Regulatory Commission (CSRC) and China Insurance
Regulatory Commission (CIRC).
Among other
things, the plan says the development of China's
capital market "lags behind" and "funds directly
raised are comparatively small in proportion" to
bank loans to companies, so it pledges to allow
more funds to be raised directly from the capital
market.
According to CSRC statistics, 121
enterprises launched A-share initial public
offerings last year,, raising a total of 446.99
billion yuan (US$62.52 billion), up 172% from the
164.26 billion yuan raised in 2006 and pushing
China to top spot in the world in terms of funds
raised through initial public offerings (IPOs). If
funds raised by Chinese companies through selling
H shares in Hong Kong and S shares in Singapore,
are included, then funds directly raised from
capital markets last year totaled 843.19 billion
yuan.
The staggering figures, however, are
dwarfed by the amount of bank loans borrowed by
enterprises. According PBoC figures, outstanding
yuan and foreign currency loans of all
institutions in the country totaled 27.78 trillion
yuan as of the end of 2007, up 16.56% from a year
earlier. Excluding 5.07 trillion yuan of loans
lent to individuals, the rest was lent to
"non-financial corporations and other sectors".
By comparison, outstanding loans borrowed
by Chinese enterprises were 27 times the amount of
funds they directly raised from capital markets at
home and abroad, or 48 times the total amount of
funds directly raised from the A-share market last
year.
At its peak last year, total
capitalization of the tradable A shares reached
over 30 trillion yuan, which was just some 8
trillion yuan more than total bank loans owned by
Chinese enterprises. In short, Chinese enterprises
still heavily rely on banks loans for their
business operation.
Therefore, "to allow
more funds to be raised directly from the capital
market", means in plain language that the
government will allow a sharp increase in the
number of enterprises launching IPOs and already
listed companies issuing new shares or corporate
bonds to draw money out of the pockets of
investors.
Following this blueprint, as
reported earlier, China will launch a Nasdaq-like
growth enterprise board in Shenzhen in the first
half of this year to let mainly privately run
enterprises go public. Index futures will also be
launched this year.
Largely encouraged by
Beijing's policy, increasing numbers of listed
companies are unveiling ambitious plans this year
to raise funds in the A-share market through new
shares or corporate bonds.
Ping An, the
country's second-largest insurer and listed in
Shanghai and Hong Kong, took the lead by
announcing on January 21 that it would raise about
160 billion yuan through issuance of 1.2 billion
new shares and 40 billion yuan worth convertible
bonds.
By last Friday, as reported by the
People's Daily, the Communist Party's flagship
newspaper, 44 listed companies (including Ping An)
have unveiled plans to raise a total of 256
billion yuan. Thirty-five of the firms said they
would issue new shares, two would make share
placements and the other seven plan to sell
corporate bonds. By comparison, in last year's
bullish market, 190 listed companies raised 390
billion yuan by issuing new shares or bonds.
Of the listed companies planning to raise
funds on the A-shares market, Shanghai-listed
Shanghai Pudong Development Bank plans to raise 40
billion yuan to boost its capital adequacy which
stood at about 8% at the end of last year, near
the minimum amount allowed by regulators. Others
include China Merchant Property, Jiangxi Copper,
Huadian Power International, Shanxi Coking,
Nanshan Aluminum, Kangmei Pharmaceutical and Antai
Group.
Ever since Ping An announced its
ambitious yet ambiguous plan to raise huge funds,
the A-share market has been under pressures with
investors dumping the insurers' shares. And
although, other than Ping An and Pudong
Development Bank, the amount of funds the various
companies plan to raise is not very large, the
frequency of fund-raising activities announced in
a short period of time has further unnerved
investors.
Some investors now say listed
companies simply see the stock market as their
auto-teller machine, and growing numbers are
beginning to question the purposes behind the
fund-raising plans.
There may be a good
reason for debt-laden firms to raise cash in the
stock market. Chinese banks' benchmark interest
rates for one-year to five-year loans are from
7.56% to 7.83% per annum. For listed enterprises
heavily reliant for their operations on bank
loans, paying interest is a heavy burden. It is
understandable, and perhaps reasonable, for them
to be eager to raise funds from the stock market,
which would ease their financial burden and boost
their profitability.
However, Ping An,
which has stable income from policy premiums, may
need to explain clearly why it needs to raise such
a huge sum. Last year, the insurance sector
regulator, the CIRC, eased restrictions on
investment by insurers in the stock market. An
insurance firm could use up to 5% of its assets to
directly trade in shares and another 15% to buy
securities investment funds. Such investments last
year helped many insurers to reap staggering
profits from the A-share market. Some investors
suspect Ping An may need more money to play with
shares.
Small investors are strongly
opposed to Ping An's fund-raising plan. The
official website of the People's Daily launched an
online opinion poll last Wednesday, which in 19
hours received 200,000 votes, with 97.6% against
Ping An's plan and a mere 2.4% votes supporting
it. It can be expected that the insurers' share
sale will meet strong objections from such
investors at Ping An's March 5 general meeting.
Responding to the strong public reaction,
a CSRC spokesman said on February 25 that it is an
important function of capital markets for listed
companies to raise funds, but listed companies
should not raise funds for "vicious" purposes.
Without naming Ping An, the spokesman said any
refinancing activity must take into consideration
investors' "bearability".
A Ping An
spokesman responded by saying the company's
fund-raising plan is in accordance with
regulations and is still going through the
company's internal procedures. Ping An will
strictly follow legal requirements and take into
consideration the timing, scale and the
bearability of the market in its fund-raising
decision, he said. The comments suggest Ping An is
being forced to consider postponing or scaling
down its fund-raising plan.
"One can never
have too much cash." That is perhaps the thinking
behind the rush to raise capital by some other
listed companies, which do not really need funds
to pay back bank loans or to expand their
businesses. They simply want to take advantage of
Beijing's policy to have more money at their
disposal. Such a drive simply shows how poor their
corporate governance is.
Since China's
stock market is still not fully market-oriented
but strongly guided by the government, its
regulators must carefully scrutinize fund-raising
plans by listed companies, rejecting the
unreasonable and irrational ones. Eager as the
regulators are to toe the power center's policy to
help curb excess liquidity, they should not
blindly let the market expand simply for the sake
of expansion, otherwise the long-term healthy
development of the Chinese stock market will be
ruined.
As the recent market reaction
shows, expansion for the sake of expansion will
eventually kill the goose that lays the golden
eggs.
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