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SCMP Reporter

Despite bitter memories of false dawns, Shanghai's soaring stock market is winning over sceptics as foreigners lead the way

Is this a sustainable rally or another false dawn that will leave many investors burnt like the others before it? This is the question investors in Shanghai are asking as the city's composite stock index has been rising   since December.

On April 3, the index passed the key level of 1,300 points - the ceiling most analysts had set - and has succeeded in staying above it.

Several times since 2001, it reached 1,300 points - but quickly retreated.

Investors say it is different this time because the players are different. In the last bull market, investment funds backed by domestic banks, brokerages, state firms and others with access to government funds speculated and pushed the index to 2,245 points in June 2001.

This time,  the market has been driven by a flood of foreign money through the qualified foreign institutional investor (QFII) scheme, the yuan's appreciation, hot money that has left the weak property market and new money from insurance firms and other institutions.

Non-state investors and outsiders are important factors in the rebound this time. Wang Yiguo,  an analyst at China Jianyin Investment Securities in Shenzhen, said more money had come in not only from QFII and Taiwan investors, who see increasing opportunity as the market opens up.

'In addition, private companies see their profits from manufacturing fall and are seeking a better return in the stock market,' he said.

'The market is changing. Retail investors are leaving and institutional and foreign investors are replacing them,' said Peng Yunliang,  strategic analyst at Shanghai Securities.

These new market participants have brought life to a market that had been marginalised during the current fever overseas for Chinese equities.

'There is widespread optimism in the market, which has allowed us to forget for a while the pain of the years of decline,' Mr Peng said.

Foreign money is not only an important source of liquidity but also a strong indicator that A shares are good buys. At  the end of  last year, QFIIs owned 214.66 million A shares, an increase of 74 per cent from the 123.17 million at the end of September last year.

Their favoured sectors are transport and storage, electric power, gas, water and financial services. UBS, the holder of the biggest QFII quota with US$800 million, has become the biggest tradable shareholder of Baosteel, the listed arm of China's No1 steel producer.

Mr Wang said the rise this year was broader and included more stocks than during the rallies of last year,  covering  property, banks, non-ferrous metals and food and drink companies.

To foreign investors, China is the odd man out in the four 'Bric' economies - the stock market in Russia last year rose more than 100 per cent and those in Brazil and India climbed more than 50 per cent, while that in China, the country with the world's fastest-growing economy, was the worst performer.

Conventional wisdom says that China's stock market cannot be indefinitely out of step with the overall economy and that, among the 1,400 listed firms, 100 to 200 are worth investing in.

Societe Generale is typical of foreign banks whose clients want more exposure to A shares.  Last month,  the French bank said it was applying to double or triple its QFII quota.

Another positive factor is the strong yuan, which reached a post-revaluation high of 8.005 to the US dollar on  Wednesday and is expected to climb further  with President Hu Jintao's US visit,  which starts tomorrow. Yuan-denominated equities are now a desirable asset.

The government welcomes foreign participation at a time when domestic retail investors are  burnt out. On Tuesday,  the China Securities Regulatory Commission approved four more applicants for QFII status.

In July last year,  the regulator lifted the quota for all QFIIs from US$4 billion to US$10 billion to encourage inflows of foreign money.

Earlier this year, Zou Lin,  director of the capital account department of the State Administration of Foreign Exchange Control, said China planned to relax rules to allow QFIIs to invest in the domestic stock market.

Amid the optimism, the market has to pass two major tests if it is to avoid the return of the bear.

One is the resumption of initial public offerings, suspended in April last year to reduce pressure on prices before starting on a plan to make US$250 billion worth of state shares tradable.

In the past few years,  listings have been like poison, with new issues leading to heavy profit taking and a substantial correction.

The authorities have given no timetable for a resumption of  new offerings, but most brokers expect it in the second half of this year.

The other hurdle is the release of the previously non-tradable state shares on to the market, likely to begin at the end of this year and peak  over the next two years.

At the end of last month, 56 per cent of the 1,400 listed firms had completed or were  completing the procedures for converting non-traded state shares, accounting for 63.5 per cent of market capitalisation. The process is due to be completed by the end of this year.

When this flood of new paper arrives, will it kill the appetite for Chinese paper?  The common verdict now is cautious optimism - happy to have the four-month rally but unsure if the market can stay above the magic 1,300-point level.



Running with the bulls tests courage