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Sale of unlocked shares by state firms clouds outlook for market

State-owned companies are taking advantage of the strong stock market rally by increasing their sale of formerly locked-up shares, a sell-off that clouds the outlook for mainland stocks despite expectations of robust earnings growth.

Key shareholders including China Life Insurance had sold 1.98 billion previously non-tradable shares since September, raking in more than 20 billion yuan (HK$22.7 billion), Shanghai-based data provider Wind Information said. The figures are based on public statements by the listed firms.

Beijing began to reform share structures in 2005, requiring the state-owned parents of listed firms to offer compensation to holders of tradable equities in exchange for the right to unlock their massive shareholdings.

Before the reform, almost 60 per cent of shares on the mainland were locked up.

A large portion of the formerly non-tradable shares are being unlocked gradually and all A shares will become free-floating by 2011.

A combined 687.2 billion shares are being unlocked this year, representing almost two-thirds of the number of tradable shares on the Shanghai and Shenzhen stock exchanges at the end of last year.

'As in-the-know investors, who are also the parent companies of the listed units, start to dump shares, they are also sounding a wake-up call to bullish retail investors that the corporate fundamentals won't support the stock prices,' said Bohai Securities analyst Zhou Xi.

'The A-share market will still see volatile trading in coming months although company earnings are set to grow in the next few quarters.'

The Shanghai Composite Index dipped 12.266 points or 0.37 per cent yesterday to 3,308.346. It has risen 81.7 per cent so far this year.

'The indicator will hover at the 3,300-point level for some time,' said Wei Daoke, a Shenyin Wanguo Securities analyst. 'The market won't rise fast and volatile trading will last for a long period.'

Analysts said some of the state-owned firms decided to cash out because of the huge rise in the market and could buy back shares when prices became attractive.

State-owned companies sold shares in some of the most profitable companies, such as Citic Securities and China Merchants Bank, Wind Information said.

Mainland-listed companies were set to report earnings growth in the fourth quarter after struggling with declining profits for the past four quarters, analysts said.

The combined profit for the almost 1,600 listed firms in the third quarter of this year dropped 1.9 per cent from a year earlier, narrowing from the 13.7 per cent year-on-year decline for the three months to June.

Cashing out

Major shareholders have sold 1.98 billion unlocked shares since September

The value of previously non-tradable A shares sold in current rally, in yuan: 20b yuan

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