Mainland share markets dash ahead of the pack

PUBLISHED : Tuesday, 11 July, 2006, 12:00am
UPDATED : Tuesday, 11 July, 2006, 12:00am

State initiatives turn Shanghai and Shenzhen into best-performing exchanges

The mainland's stock markets were the world's best performers among major exchanges in the first half of this year, a dramatic reversal after four consecutive years of finishing last.

The benchmark Shanghai Composite Index rose more than 500 points to 1,672.21, a 44 per cent gain, while the Shenzhen Composite Index did even better, climbing 55.4 per cent to 433.22.

Russia, with a 32.8 per cent increase, and India, up 12.9 per cent, came next, even though both indices fell sharply in May as investors fled emerging markets in the face of rising global interest rates.

Mainland markets escaped the May rout because they remain largely isolated from international capital flows, thanks to China's closed capital account and currency controls, according to Fraser Howie, co-author of Privatizing China.

Yet, even if the mainland markets are in some ways very sheltered, the turnaround is nonetheless impressive, and it was fuelled in part by government policy initiatives, some designed to support share prices and others to discourage alternative investments such as property which gave stocks an indirect boost.

As markets bottomed out last year at eight-year lows, the government suspended new share sales, increased foreign investment quotas and launched a programme to make shares owned by the state (which made up about 60 per cent of total market capitalisation) tradable on the exchanges.

The resulting bull market has provided a huge boost for the struggling brokerage industry, which has been plagued by corruption, incompetence and plummeting stock prices in recent years.

Orient Securities, the mainland's eighth-biggest brokerage, is typical.

It said yesterday it made a profit of 551 million yuan in the first half, compared with a 27 million yuan loss in the same period a year earlier and a loss of 296 million yuan for last year.

The company said 443 million yuan of its 982 million yuan in revenue came from proprietary securities trading in the first half, while income from asset management rose to 230 million yuan from zero in the same period last year.

Orient's total revenue in the first half of last year was just 127 million yuan.

In an effort to provide further support to brokerages and the market, the central government will allow margin trading beginning next month and could also change the current rules to allow same-day trading.

Following their rapid rise, Chinese stocks are no longer considered cheap.

Price to future earnings ratios are 24 times for Shanghai A shares and 37 times for Shenzhen A shares.

'The key for the Chinese stock market is to get away from having a good six months or a good year and convert that into a meaningful long-term bull market and an engine of growth for the economy,' Mr Howie said.