China's insiders regain their faith
Market-boosting action and promise of new capital signal a long-awaited bull market, writes Jamil Anderlini
Last Tuesday was the busiest day Zheng Haijing has seen in a long time.
Ms Zheng is a cashier at the Huaxia Fund Management outlet on Beijing's Financial Street, and after Monday's post-Spring Festival rally in the A-share market she had more customers in a day than she normally has in a week.
The millions of ordinary retail investors remain unprepared to put their trust back in a market that saw its capitalisation halved over four years to hit eight-year lows in July last year.
But it seems industry insiders and bureaucrats working on the street at the centre of the country's financial apparatus have started to regain their faith - and are beating a path back to intermediaries such as Ms Zheng.
The consensus among analysts and international investors also seems to be that government market-boosting measures and an anticipated flood of new capital signal the beginning of a long-awaited bull market.
However, everyone from Financial Street to Wall Street agrees that the running of the bulls is very much conditional on one key factor - improving the quality of mainland-listed companies by resuming the flow of good, profitable enterprises coming to market.
After a false start that saw the market rise about 20 per cent and then lose half its gains by the middle of September, benchmark indices are now up almost 30 per cent from their nadir in the middle of last year. That is despite the fact that almost 60 per cent of the 563 companies that have reported their results for last year posted losses or loss warnings.
'Quite simply, there are an awful lot of bad companies,' says Fraser Howie, an investment banker and a co-author of Privatising China.
'If you are a portfolio investor, what you can buy in the A-share universe is pretty limited.'
Analysts say it is possible companies expecting losses are more likely to report results early and therefore the situation at the remaining 763 A-share companies can be more positive.
But according to Ha Jiming, the chief economist at China International Capital Corp, the losses reflect a sharp drop in profit growth in the overall economy that is especially severe for non-resource-related manufacturing industries, which make up a large proportion of the A-share index.
Even officials at the China Securities Regulatory Commission agree that about 200 of the worst performing listed companies eventually will have to be delisted.
The question for most investors is when the government will sanction the first initial public offering since new listings were officially suspended in the middle of last year.
For the regulator, allowing new share issuances is dependent on the success of the ongoing state share reforms. These require each A-share listed company to gain minority shareholder approval for their individual plans to float the about two-thirds of stock that is currently designated as non-tradable state or legal-person shares.
Most of the optimism among investors comes from the relatively smooth progress of this reform so far. At present, companies representing more than 35 per cent of the market's capitalisation have had their share reform packages approved by minority shareholders and the remaining companies are expected to have theirs approved by the end of the year.
Once companies representing 60 per cent of the market's capitalisation have begun the reform process, regulators will allow new share issuances to resume.
At the present pace, initial public share offerings will begin in earnest after the May holiday, according to high-level sources.
'The first public offering will be a small or medium-sized company with excellent growth potential,' one high-level government source said. 'We are trying to find a company like Baidu to go first.'
The government is also considering allowing large offshore-listed Chinese companies to raise money on the Shenzhen and Shanghai exchanges, according to a draft document sent to the Guotai Junan brokerage and others in the market.
Bank of China and the Industrial and Commercial Bank of China, two of the Big Four state-owned commercial banks, are expected to allocate a portion of their shares to be listed on mainland exchanges in addition to giant public offerings planned for Hong Kong later this year.
As well as allowing new listings, the government has a number of other options to help boost markets. Foreign investors will gain more access to A shares this year through a simplification of the qualified foreign institutional investor (QFII) scheme and through 'strategic' investments in state shares before they are eventually made fully tradable in two or three years.
The government currently limits the amount of QFII quotas at US$10 billion but the actual amount granted so far is about US$6 billion. The regulator has the scope to increase the total to US$30 billion but is reserving this measure to use as a 'silver bullet' if market conditions should turn sharply down again, according to high-level sources.
'The entry of foreign funds into the market remains small but stimulates domestic investors to enter,' says Wang Yiguo, a strategic analyst at China Jianyin Investment Securities.
Those domestic investors are still extremely wary of the market but Chen Zizuo, a senior official at the Shanghai Stock Exchange, is convinced that once the general public becomes more confident they will start shifting deposits from bank accounts to securities accounts.
This is highly significant in a country where outstanding bank deposits stand at more than 28 trillion yuan, compared with about four trillion yuan in the A-share market, according to the head of China research at Credit Suisse, Vincent Chan.
Mr Chan points out that valuations of A shares have fallen from their previous irrational highs to almost the same level as their H-share counterparts and he joins the consensus that believes the market is in the early stages of shedding its bearish past.
'The key obstacle now for the market is the lack of good companies. The most important thing for A shares to really go into a bull market is for the government to reopen initial public offerings,' he says.