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Shirley Yam

'The gain underscores the resilience of China's domestic stock markets, home to the world's best-performing stock indices, as global markets plunged ...'

'The sale's success could also bolster government efforts to sell stakes in large state-owned companies ranging from large banks to phone companies ...'

Bloomberg News

YOU MIGHT WELL be thinking these quotes are drawn from an analysis of  this week's record-setting A-share sale by  Bank of China that saw the stock gain 22 per cent on its first trading day.

You'd be wrong.

These comments  were made in a December 20, 2000, report on the initial public offering of Baoshan Iron and Steel, the country's biggest steelmaker. Its shares outperformed the bank's,  soaring 46 per cent on  debut. The benchmark Shanghai Composite Index gained three points that day to close at 2,050. (Despite this year's 50.59 per cent rally, the index closed yesterday at just 1,730.19).

At the time, Baosteel's 7.85 billion yuan offering was not only the largest  mainland IPO but also the first one to feature all the trappings of a New York-style offering, including a roadshow and a price by book-building. Many, including this  columnist, saw this as emblematic of both the depth and maturity of the mainland stock markets.

The Baosteel sale triggered a rush to market that saw more than 130 companies unveil plans to sell a combined 100 billion yuan worth of A shares. Among them were large Hong Kong-listed corporations such as PetroChina, the mainland's largest integrated oil company. Listing such 'heavyweights' was seen by market regulators as a quick way to provide stability and quality to an A-share market still crowded with low-grade but expensive stocks.

Some observers got carried away in their enthusiasm. One analyst at a leading securities firm called a press conference to predict 'the death of H shares in five years' time'.

The euphoria soon dissipated. In less than six months,  the Shanghai A-Share Index peaked at 2,245 and began a slump that was to last for years. Sinopec, Asia's biggest oil refiner and as blue a chip as China then had, pressed ahead with its  11.8 billion yuan offering, only to see its shares rise a paltry 3 per cent on their first trading day.  That was to be the last key  A-share offering until the Bank of China.

As corporate scandals came tumbling out one  after another, and investors  increasingly  worried about the enormous overhang on non-tradable, state-owned shares in listed companies, a vicious  bear market took hold. The Shanghai index wasn't to hit bottom until mid-2005, when it slid to 998. None of the big IPO plans ever materialised.

The natural question, given all the hoopla surrounding the successful Bank of China  share sales in  Hong Kong and Shanghai, is whether we are witnessing a rerun of 2000.

When you look at the fundamentals, the answer is probably no. First, the valuation bubble has been largely reduced. 'The size of China's economy is much bigger now,' said Credit Suisse China strategist Vincent Chan.

The A-share market's capitalisation is equal to just 20 per cent  of the gross domestic product, compared to 50 per cent at the previous peak. Moreover, the state share reform that began last winter has removed much of the non-tradable share overhang that once  accounted for about 66 per cent  of the  market capitalisation.

Just as important perhaps is the growing sophistication of mainland investors. The number of institutional investors, who in theory  tend to be more value-conscious than retail traders, has significantly increased. Among them are overseas buyers who now have  access to the A-share market  through the qualified foreign institutional investor (QFII) programme.

Overriding this all, however, is the central government's determination to revive the stock market. While the previous leadership was widely seen as hostile to the A-share market, a 2004 State Council announcement underscored that policymakers now realise that a key element in the drive to fix the  country's shambolic banking system lies in reducing the  dependence on bank loans as  the principal source of capital.

Beijing's open support for the stock market has not only bolstered the confidence of existing investors but helped bring in new money - estimated to be more than 260 billion yuan in the second half of the year. This includes newly approved equity funds and QFII as well as investment by the Social Security Fund and insurance firms. An additional US$3.3 billion  QFII quota is also said to be in the pipeline.

Beijing has also approved controversial reforms such as the introduction of index futures, short selling and margin financing. Trading volume will significantly increase when these reforms take hold.

All this points towards a bigger market and bigger deals in the near future. Yet it is important to remember that two fundamental issues remain largely unaddressed. The first is the 'planned economy' mentality of the regulators. The second is the poor risk management of most domestic financial institutions, securities firms in particular.

shirley.yam@scmp.com



Beijing's new mindset will avert a rerun of 2000 stock market bubble