Market revival effort fails to inspire

PUBLISHED : Tuesday, 12 July, 2005, 12:00am
UPDATED : Tuesday, 12 July, 2005, 12:00am

Increase in foreign investment quota remains overshadowed by concerns surrounding sale of non-tradable shares

The Chinese government's latest attempt to revive slumping domestic stock markets failed to impress yesterday as investors shrugged off a new series of emergency measures that could potentially bring in billions of dollars of foreign and domestic capital.

Brokers said investor despair, fears of poor corporate earnings and an unpopular plan to sell more than US$200 billion in non-tradable shares overwhelmed news of the measures, which included increasing the overall investment quota for qualified foreign institutional investors (QFII) from US$4 billion to US$10 billion.

The China Securities Regulatory Commission (CSRC) also announced it would allow fund management companies to use shares as collateral to raise more funds and opened up additional channels through which the country's insurance and pension funds can invest in stocks.

In addition, the government will lift a long-term ban on stock investments by state-owned firms, a sector responsible for much of the financial irregularities and speculation in the mid-1990s.

A CSRC spokesman said there was no official timetable but the new QFII quotas would be handed out 'within a relatively short period of time'.

However, there is widespread scepticism about the actual foreign demand for investing in the A-share markets which have slumped more than 20 per cent this year.

'Of the US$4 billion already approved, only US$1 billion is in equities and I would question whether there is a huge amount of pent-up demand from foreigners to put money into the equity markets,' said Gary Evans, the Pan-Asian equity strategist for HSBC.

The Shanghai and Shenzhen A-share indices surged in the opening minutes of trade yesterday, but they retreated swiftly as investors took profit on the gains. The Shanghai A-share Index slipped 0.62 per cent to 1,062.45, as it continues to hover near the psychologically important 1,000-point level. Its Shenzhen counterpart slid 0.97 per cent to 246.635. Turnover for both markets was 8.3 billion yuan.

The continuing spiral downwards casts a huge shadow over whether the CSRC can complete its controversial plan to sell billions of dollars of non-tradable shares which account for 60 per cent of the 2.87 trillion yuan in market capitalisation.

This was the main reason for yesterday's measures.

The CSRC also said that listed companies would not be allowed to raise additional capital until they had resolved the non-tradable shares issue and obtained shareholders' approval over compensation.

Huang Yongdong, an analyst at Yi Bang Investment, said that the measures would help the market in the long run and assist the sale of the state shares.

'But I do not know how much impact they will have in the short term and how much capital they will bring in. The main issue is the [financial] health of listed companies,' he said.

The dismal performance of the mainland markets has taken a toll on most of the 114 brokerages, which last year posted a combined loss of 15 billion yuan. But the figure is seen as a conservative estimate, given that the likes of Shenyin & Wanguo Securities, one of the country's biggest, alone recorded between four billion to five billion yuan, according to sources.

A number of brokerages are awaiting aid by central government agencies either through recapitalisation or collateral loans.

Those in the queue include China Galaxy Securities which is expected to receive a 10 billion yuan recapitalisation from China Safe Investment - better known as Central Huijin Investment - China Securities and Hua An Securities.

To help retail investors swindled by rogue brokers or who have suffered losses because brokerages have gone under, the CSRC said it will proceed with a government-backed compensation fund.