FINANCE-CHINA: Selling the House Silver to Help an Ailing Market

By IPS Correspondents Reprint | | Print |

Antoaneta Bezlova

BEIJING, May 31 2005 (IPS) - While the Chinese government’s ambitions to create rivals of the New York and Hong Kong stock exchanges have failed to materialise, Beijing finally has a plan on how to lift the fortunes of its ailing stock market.

China’s market regulators have launched a tentative pilot programme to begin selling off a mountain of state-owned equity, which until now was non-tradable.

They hope that freeing up the market from this logjam would restore investors’ confidence and give a boost to sluggish market sentiment.

”Year 2005 will be a crucial year for capital market reform and development,” Shang Fulin, chairman of the China Securities Regulatory Commission, China’s securities watchdog, promised the media at a press-briefing last December.

China’s stock market had once crashed since prices peaked in the summer of 2001. At that time the government believed that the Shanghai stock exchange would overtake Tokyo to become the world’s third largest by 2010.

But the mere attempt to solve the problem has the potential to tank share prices in China. It could also have a knock-on impact in overseas markets where Chinese companies are traded.

Two-thirds of the equity in China’s 1,377 listed companies is in the form of shares that cannot be traded on stock exchanges and are mostly owned by the state. By some estimates, the value of these shares is now equal to over 300 billion U.S. dollars.

Investors are spooked by the possibility that sooner or later these shares will be dumped on the market, diluting the value of the stock already there.

Two previous decisions to sell off some of the non-tradable stock, in 1999 and 2001, were hastily reversed after news of the sales created panic among investors and sent the markets tumbling. Beijing had hoped to use the proceeds from the sale of government-held shares to fund a national pension scheme.

Though the government quickly aborted the sales, in 2001 the markets lost a quarter of their value in thee months. They have kept falling ever since.

Last year, Shanghai and Shenzhen bourses lost 15 percent or more of their combined value, one of the worst stock performances in the world.

In addition, most of China’s 130 securities firms have been found to be insolvent, and only a dozen or so can survive. Many brokers stand accused of stealing clients’ funds. But despite hundreds of arrests, no culprits have been punished in the many cases of corruption and fraud.

Auditors at one failed investment fund, China Eagle, discovered last year that it had lost 532 million U.S. dollars by using 220 million U.S. dollars in clients’ deposits and 72 million U.S. dollars in entrusted client treasury bonds to speculate.

China Eagle then took out short-term bank loans until June 2004. After that efforts to hide the huge losses were finally exhausted.

After a string of corporate scandals and trading irregularities, most of which were discovered by accident, investors have become convinced the stock market is not merely a ”casino”, but a market rigged and manipulated by insiders.

A Ministry of Finance investigation in 2002 found that 90 percent of listed companies cooked their books to inflate Performance figures.

With few exceptions, listed companies are all state-owned enterprises with poor corporate governance and prone to misconduct. Over the past decade, the government has tried to use the stock markets to raise capital for the purpose of turning around the state-owned companies, but so far their economic performance has been abysmal and trading in their shares is vulnerable to abuse.

Too many domestically listed state companies have not been able to adapt to competition and the market economy and have lost money, squandering the capital raised by issuing stocks.

As a result, a great many Chinese investors have lost all their savings and the early enthusiasm for buying shares has vanished.

”I’m quite pessimistic about the near future,” said one former stock trader, Wang Jingwei who had sold off his shares. ”Too many inefficient state companies used the stock market to get a fresh blood infusion but they are not able to use the capital to generate profits.”

The number of Chinese owning stocks has slumped from nearly 70 million to some 10 million. The number of active traders, market watchers says, is as few as 500,000. Weekly trading volume on the Shanghai stock exchange has plummeted from a high of 178 billion yuan (21.5 billion U.S. dollars) in February 2000 to just 31 billion (3.74 billion U.S. dollars) in February this year.

Against this sombre background, the government is being forced to implement measures to restore confidence. But this time regulators are moving cautiously.

In April the China Securities Regulatory Commission (CSRC) selected four companies for a trial programme under which non-tradable shares would be listed and the state’s holdings gradually reduced.

By selecting just four companies, the central government was making a pledge that there will be no mass sell-off of state shares.

”It is not simply a programme of selling state shares, but a system that will advance the capital market,” Shang Fulin, CSRS’s chairman was quoted as saying by the state news agency ‘Xinhua’.

Analysts say that smooth disposal of state holdings would depend much on the pricing of the shares. Higher than fair prices would hurt the interests of individual investors but low prices would ruffle the feathers of state asset owners.

”It would be hard to reach a consensus on the pricing but everybody knows that the shares have to be sold so we hope for a compromise,” said Dong Chen, a market analyst with China Securities Co.

In another measure of market recovery, regulators have promised to crack down on security houses and create a six billion U.S. dollar clean up fund to compensate small investors who lost money with brokerage firms.

CSRC is also discussing a proposal with other parts of the government to increase the amount of money foreigners could invest in China under an investing scheme launched in 2003.

China’s domestic Class A shares, long the domain of domestic investors, were made available that year to qualified foreign institutional investors, but with severe restrictions.

Some 26 foreign investors were allowed to put a collective four billion U.S. dollars into China’s capital markets. Local media has reported that the quota could be increased in the future to as much as 10 billion U.S. dollars.