Shenzhen puts its future on the line

THE Shenzhen stock exchange decision to halt A-share listings will do it more harm than good in the long term.

The desperate move will undermine the southern market's position and reputation as a cash-raising channel for Chinese enterprises, and give its Shanghai counterpart an upper hand in luring more company listings.

Some Shenzhen companies have already established footholds in Shanghai by acquisitions of listed counters there.

The Shenzhen market gave no details about the listing ban on Tuesday in a terse statement of just two sentences.

It did not specify how long the new measure would be effective or the reason for the suspension - saying only that new listings would resume in accordance with the market situation.

The decision is understandable in a falling market.

Shenzhen shares for domestic investors have been plagued by worries related to a flurry of new listings and China's economic austerity programme, launched last year.

The reform package on exchange rate and taxation weakened the market further.

The Credit Lyonnais Shenzhen A share Index has lost about 10 per cent since the beginning of the year.

The announcement, albeit brief, gave a strong impetus to the market on Tuesday when the A-share gauge of Credit Lyonnais rocketed 3.88 per cent.

But the boost was short-lived. The index nosed up a minuscule 0.22 per cent yesterday as investors began to wait and see what would happen next.

''The halt has no essential meaning,'' said a broker at a Shenzhen brokerage house, ''because the new listings will come eventually, albeit at a latter date.'' The move only underlines the exchange's deep concern at mounting dissatisfaction from mainland investors as Shenzhen is very vulnerable to stock failure.

The memory of the stock fiasco of the summer of 1992 is still vivid.

Then, thousands of would-be investors swarmed to the city to buy a chance of subscribing for new shares.

However, hopes of getting rich quickly turned into protests against corruption, leading to chaos.

''Whatever the bourse says, it will definitely ruin Shenzhen's relations with other areas in China,'' said a Chinese market player.

He expected more companies to seek listings on the Shanghai exchange, because Shenzhen had given no indication when it would lift the listing ban.

Shanghai has so far shown no interest in following in the footsteps of its southern counterpart.

The mainland market player also expected securities houses to shift their business focus to the Shanghai market.

''The listing halt will, in the long term, damage its [Shenzhen's] image,'' he said.

Already, Shanghai, with its potential to be the major driving force of economic development in China, is racing ahead of Shenzhen in luring mainland and foreign capital.

Despite Shenzhen's proximity to Hong Kong, the city is nothing to China's central Government compared with Shanghai, which is also more familiar to overseas investors.

The importance of Shanghai is evident from the fact that more and more Shenzhen companies are buying into Shanghai concerns in a bid to have a greater presence and wider business scope in the mainland market.

For example, property developer Shenzhen Vanke bought a five per cent stake in Shanghai Shenhua late last year.

Recently, Shenzhen Tianji Optical Electronics Technology, a private company backed by Sichuan's Chengdu University of Electronics Science, took 7.2 per cent of Shanghai Feile Acoustics to explore the market in northeast China.

The acquisitions followed the unsuccessful bid by Shenzhen Bao An Enterprises to buy 18 per cent of Shanghai Yanzhong Industrial last September.

The latest move by the Shenzhen exchange also underscores its misconception of its role as market regulator. As an exchange, its main function is to create a better market environment for trading, but not overemphasise price performance.

The market will determine what will be the equilibrium price and how many companies should be listed at a time - as is the case in Hong Kong.