Headline: China's Latest Opening of Market Hits a Snag

Source: New York Times, 1 Mar 2001

URL: http://www.nytimes.com/2001/03/01/business/01SHAR.html?pagewanted=all

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Notable quotes from article:

...China now has more individual stockholders than any other country besides the United States ...Almost none of those investors buy for the long term and few spend much time studying the companies involved, partly because the information available is sketchy at best. Instead, the markets move largely on rumors and second- guesses. ...The result has been the building of what some analysts regard as a dangerous market bubble. ..."At some point these people are going to start selling, and then there's potential for carnage,"...

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SHANGHAI, Feb. 28 — Thousands of Chinese investors jammed brokerage houses today in hopes of buying shares on the newly liberalized hard currency stock market. But most people came away disappointed because there were not enough shares to go around.

"My son gave me $27,000 to invest, but I was only able to invest $7,000," a 64-year-old woman said, as a crowd behind her argued with helpless brokerage clerks. "Today, you just can't buy in."

After Beijing announced last week that citizens would be allowed to buy Class B shares — stocks denominated in Hong Kong and United States dollars and previously reserved for foreign investors — money poured into the country through wire transfers to residents from friends and relatives abroad.

Long, woolly lines formed on the streets as people waited in the cold to open trading accounts. Black market rates for the dollar shot higher. And would-be investors arrived with cash from Hong Kong and Taiwan to be ready when trading in the shares, halted more than a week ago, resumed today.

When the markets opened, buyers hugely outnumbered sellers and more than three-quarters of the stocks quickly jumped their daily 10 percent limit, many on the turnover of a single share. B share trading volume in Shanghai totaled only $750,000 by the end of the day, compared with $15 million to $20 million on a normal day.

It was yet another twist in the helter-skelter development of China's capital markets, which the government established as a cautious experiment more than 10 years ago and which have since fattened into one of the biggest share-trading systems in Asia. China now has more individual stockholders than any other country besides the United States and the total market value of its publicly listed shares exceeds $500 billion.

Almost none of those investors buy for the long term and few spend much time studying the companies involved, partly because the information available is sketchy at best. Instead, the markets move largely on rumors and second- guesses. There are periodic government investigations of stock price manipulation, and one sweeping cleanup is under way.

The result has been the building of what some analysts regard as a dangerous market bubble. The Class A market, denominated in Chinese yuan, has risen for years even though many of the companies listed there are low quality by international standards. Now, the government-orchestrated rally in Class B shares threatens to create a similar bubble.

"At some point these people are going to start selling, and then there's potential for carnage," said Peter Alexander, chief representative for Nationwide Mutual Insurance and a longtime Chinese stock market watcher.

Only about 5 percent of China's listed stocks are B shares, which were created in 1991 to give foreigners a chance to invest directly in Chinese companies and to give Chinese companies a way to raise capital. The B share market, denominated in Hong Kong dollars in Shenzhen and in United States dollars in Shanghai, never really got off the ground because there were too few shares traded to attract big Western investors. Chinese companies in search of foreign investors turned instead to Hong Kong and other markets overseas.

The thinly traded B share market, meanwhile, became one of the most volatile markets in the world. Last year, the Shanghai B share market surged 135 percent and the Shenzhen B share market rose 63 percent, but both had been slumping this year. Today, the Shanghai B share index surged 9.88 percent, to 91.42, the highest since May 1997, while the Shenzhen B share index gained 9.69 percent, to 140.09, its highest in over four years.

With China's entry to the World Trade Organization looming, regulators have begun looking for ways to make the market more liquid to compete with offshore markets when China's financial system barriers begin to fall.

China is expected to merge the B share market into the larger yuan- denominated A share market eventually, but that will have to wait until the country's currency is more freely convertible — something that is not expected to happen for several years.

Throwing the B share market open was an interim solution. The Chinese hold about $75 billion in foreign exchange savings accounts and domestic companies hold another $55 billion in bank deposits. Even a fraction of that cash would increase liquidity in the 114 Class B stocks.

There is no shortage of eager investors. "It's meaningless to leave money in the bank, the interest rate is too low," said Tong Jialu, a 65-year-old doctor of traditional Chinese medicine who visited a basement Shanghai brokerage firm office in faded blue jeans and a gray flannel jacket. "Buying stocks is better than saving."

The trouble is getting the money into the market through the narrow window that the 10 percent limit on daily price movements allows. Until the rules changed, investors needed to show a foreign passport and have at least $10,000 deposited in a trading account to buy B shares. Now local Chinese can open a trading account with a minimum of $1,000 and a domestic identification card. By late Tuesday, more than 134,000 new B share trading accounts had been opened in Shanghai alone, nearly doubling the number of accounts registered there.

But with such obvious demand, few shareholders of Class B stock are willing to part with their shares until prices are much higher.

Trading in the Inner Mongolia Erdos Cashmere Company, the country's biggest producer of fine goat's wool, for example, opened at 55.7 United States cents a share, up 10 percent from its previous close and at a 12-month high, but only one share was sold. No one was willing to sell more to satisfy orders for more than 55 million shares. Most of the market's stocks are expected to jump their daily limit on little volume for several days.

The newly liquid markets could prove a boon to cash-hungry Chinese companies that have been prevented from selling stock on the yuan-denominated market, where listings are controlled by Beijing. Those controls are relaxing but have already been relaxed in the B share market. Private companies, in particular, can compete freely for capital by selling B shares. The A share market continues to favor state-owned companies.

-- Andre Weltman (aweltman@state.pa.us), March 01, 2001