Mainland share sale forecast to boost markets
China's long-overdue announcement of a pilot programme to gradually float non-tradable shares will bolster investor confidence in its stock markets over the long run, analysts said yesterday.
However, some predicted short-term volatility from an increase in the share supply and lingering uncertainty over key elements of the reform, such as lifting the ban on newly listed companies putting all their shares on free float after an initial lock-up.
Non-tradable state-owned and legal-person shares held by the government and state-backed entities and transferable only through privately negotiated deals accounted for 68 per cent of the country's stock market capitalisation of 3.48 trillion yuan at the end of March.
Owners of these non-tradable shares often hold huge sway over listed firms and have long been blamed by minority shareholders for widespread corporate abuses.
Since Beijing's ill-fated efforts to force the sale of state shares in 2001 to finance the under-funded pension system, worries that the government would flood the market with non-tradable shares have depressed share prices.
Despite the country's galloping economy and surging property prices, its share indices are among the world's worst performers this year. Last Wednesday, the benchmark Shanghai A-Share Index was at a near six-year low.
'[The state-share issue] has been an overhang that has even deterred qualified foreign institutional investors [QFIIs] from the market,' Deutsche Bank economist Ma Jun said.
'Even without a final solution plan on the table, the mere announcement of a practical operation plan will help boost investor confidence and support the [yuan-denominated] A-share market.'
'We'd been waiting for the news for a long time,' added Ke Shifeng, a director and portfolio manager at Edinburgh-based specialist investment manager Martin Currie, the largest QFII investor in the mainland with about US$320 million under management.
'With resolution of the state-share issue, I believe foreign investors will channel more money into China provided the China Securities Regulatory Commission and State Administration of Foreign Exchange raise QFII investment quotas,' he added.
The weekend announcement may also prompt some QFIIs to reallocate funds parked in cash and fixed-income products to the stock market.
Unlike the 2001 scheme, the new plan will let shareholders of listed companies negotiate how and at what price the non-tradable shares will be sold. The support of two-thirds of all voting stakeholders and voting tradable shareholders is required for any such plan.
The new policy further seeks to minimise negative impact on the market and encourage long-term investments by imposing a lock-up period. Owners of non-tradable shares selected for the pilot programme must pledge not to sell their holdings in the first year the shares are on free float.
