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Towards Rational Exuberance
It is a chilly summer for the fledgling domestic stock market. In China's two stock exchanges based in Shanghai and Shenzhen, indices have fallen more than 10 per cent over the past three weeks, shedding about 600 billion yuan (US$72.5 billion ). Such a huge tumble is rare in the 10-year-old market, according to today's China Daily.
The stagnation is one of a series of discouraging news for shareholders, including the government's State share-cutting plan, the central bank's order to ferret out bank money in the stock market, and the excessive issuance of new shares.
The State Council announced its latest scheme to cut State shares in June, requiring State-owned public firms to sell State shares equivalent to 10 per cent of the new shares they would issue, to fund the country's skimpy social security system.
The scheme was widely viewed as a pioneering step because diluting the overwhelming State shares can help improve the corporate structure of State companies.
It can also increase the liquidity of State assets, given that only 35 per cent of shares of State companies are tradable on the market so far.
However, the pricing method of State shares, which aims to sell State shares at market prices, became the Achilles' heel.
By economists' calculations, the value of each State share is less than 2 yuan (US$0.24 ), while the average share price in the stock market is 10 times that.
The inequitable pricing system caused panic in the market. Both Shanghai and Shenzhen bourses dropped for six straight trading days starting from July 24, when four companies took the lead to exercise the State share-cutting formula.
That is not the full story, however. The People's Bank of China's recent investigation on illicit use of bank money in the stock market has driven the market down further.
Although there is no official data as of yet, it is estimated that about 600 billion yuan (US$72.5 billion ) of bank funds has flown into the stock market through illegal channels. Most of the money is believed to be used to manipulate share prices to lock high profits.
Cleaning up the "hot money" can perhaps make the market healthier, but the price is that the market would suffer "anaemia" in the short run.
Furthermore, the massive launch of new shares in past months had further aggravated the situation.
The China Securities Regulatory Commission (CSRC) replaced its approval on new share issuance, with a lenient registration system earlier this year, which stimulated public firms to rake money by issuing more shares.
Some 120 public firms have issued or made plans to issue new shares in the past four months. The money they would pool amounts to approximately 80 billion yuan (US$9.7 billion).
In comparison, only 184 companies issued new shares last year, collecting 74 billion yuan (US$8.9 billion).
The rapid expansion of market scale diluted investors' capital and shot indices down.
But the worst thing is not the sluggish market, but a dent in the confidence of investors, which is key to the stability of the market.
The performance of many public firms has undermined investors' credit on the immature market.
In sharp contrast to their eagerness to issue new shares and pool money, many companies refused to give shareholders due returns.
By August 1, 262 companies had released their interim financial reports, but only 21 of them would give shareholders dividends or rationed shares.
And the dividends some offered could only cover shareholders' stamp duty.
They are not poor. Many companies have to employ fund managers to deal with their idle money because they cannot find profitable industrial projects to use the money they collected from the stock market.
For example, the Jiangsu Yueda company was found to have 120 million yuan (US$14.5 million) entrusted to investment funds. The company collected 520 million yuan (US$62.8 million) last year by issuing new shares.
Some companies went even further by turning back to the stock market and manipulated share prices with the money they collected, stirring drastic ups and downs.
More frightening to investors is the cheating committed by public firms.
The Yinchuan Guangxia company dropped a bombshell in the market recently, as the media disclosed its startling fabrication of profits.
The company forged stellar achievements last year, leading to a 440 per cent surge in its share price.
If the market is full of such scandals and traps, how can investors rebuild their confidence��
On many occasions, CSRC chairman Zhou Xiaochuan stressed that the quality of public firms is the cornerstone of the development of the stock market.
In this sense, the recent slide of the market is just a symptom of the jumble of problems with many public companies.
Whether or not the fragile market can regain strength hinges on the improvement of public companies' credit.
Sources: China Daily
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