Beijing to Restore Market Momentum

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May 11:Country Risk - Beijing to Restore Market Momentum

Author: Ellen J. Silverman
Date: 2005-05-11


Chinese market regulators this week announced a trial program to fully privatize listed companies in an effort to revive China's depressed stock exchanges.

Chinese market regulators this week announced a trial program to fully privatize listed companies in an effort to revive China 's depressed stock exchanges.  Even though share prices hit a six-year low, analysts said the reform measures might ultimately help revive the markets.

State companies that hold shares in four companies listed on the Shanghai Stock Exchange - Shanghai Zi Jiang Enterprise Group, Sany Heavy Industry, Tsinghua Tongfang and Hebei Jinniu Energy Resources - will relinquish control and offer their currently nontraded equity for trading on the exchange, according to the China Securities Regulatory Commission.  The trial may eventually be extended to all of China 's listed companies.

The issue of the state's vast holdings of nontradable shares has weighed on Chinese markets amid fears that the arrival of the stock on the market would reduce the value of shares currently held by investors.  Investors have cited corruption, management incompetence and the cooling effects of government controls on the state-owned companies that crowd the country's two stock exchanges in Shanghai and Shenzhen as reasons for the slump.  "We need to start reducing state control and really putting companies into a market environment," said He Jun, director of research at Anbound Group, an investment consultancy in Beijing . "This reform isn't going to solve all the share markets' problems, but without this sort of change you're never going to solve any of those problems."

Government officials are reluctant to give up their control of companies and a flood of new shares will dilute the value of those currently traded.  While many private companies were once eager to issue equity through the stock markets, most of the 1,000 or so companies allowed to list have actually been state-owned.  These companies often unloaded a small fraction of their stake onto the market, leaving the majority of equity and effective control, in the hands of government officials.

About two-thirds of listed Chinese companies' value is locked up as nontradable, state-held equity, analysts estimate.  " China 's domestic stock markets aren't at all pure markets," said Ai Qunce, chief executive of International Credit, a Chinese investment company. "The government has used them to park many badly performing state-owned companies, and so there's always been a fundamental distortion between China 's economic performance and the performance of the stock market."  The merging of market investment with state control has often failed to improve the companies' performance, while state-appointed managers' access to investors' capital has led to widespread corruption that has battered investors' confidence, analysts say.