New Trading Limits Represent Progress

The recent lifting of floor trading limits for poor performing listed firms marked a step forward in the Chinese authorities' efforts to improve the order of the stock market and curb speculative behaviour.

Analysts said market sentiment against risk heightened last week following an announcement by China's two stock exchanges that they would scrap the floor of the 5 per cent daily trading limit for particular-transfer shares, or PT shares, pointing to companies that had posted net losses for three consecutive years.

The news sparked a sharp sell-off of the shares as well as special-treatment shares (or STs) last week.

Recently, the prices of most of the PT shares declined sharply. Shenzhen-listed Zhonghao A and Shanghai-listed Hongguang and Narcissus have slumped by about 10 per cent during the past two weeks.

A few years ago, China slapped trading curbs on companies with two straight years of losses, setting a 5 per cent daily price limit, up or down, instead of the usual 10 per cent for ordinary shares. The counters were classified as special-treatment shares.

In 1999, China's regulators put companies with three years of losses under PT status, and saddled them with a 5 per cent daily limit.

But both high-risk counters continued to draw retail punters who snapped up the shares at low prices speculating that the government would not let them go down.

The new regulation will teach investors to gradually learn to take market risks seriously and follow market principles, analysts said.

It affected buying enthusiasm in the market last week, which was also hurt by the pending disclosures of mid-term reports that made investors cautious against those active shares, they said.

A series of reform measures, including the restructuring of funds, changes in ways of issuing new shares and a lifting of the floor trading limit of PT shares, have demonstrated China's market regulators' determination to standardize investment behaviour, promote healthy market development and to discourage irrational speculations.

The market experienced a strong rally during the past few weeks, which heightened investors' confidence and helped to stabilize sentiment.

According to a research report recently issued by Ping'an Securities, the bullish performance is expected to remain in China's stock market for another 10 years.

The report said China's economy will maintain a nominal gross domestic product (GDP) growth of 7 per cent to 8 per cent annually during the next five years.

The rate is stronger than the average of 3 per cent in the United States and 2 per cent in the United Kingdom.

Steady and sound growth of the GDP as well as low inflation will be supportive to market value and the indices of the bourses, the report said.





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