16 Mar 2001 Market may crash any time: China regulator Top official of Shanghai Stock Exchange says nation faces 'major problem' if stocks collapse

A CHINESE market regulator said the nation faces a "major problem" should stocks collapse, marking the frankest assessment yet of a rally that many foreign analysts say can't last.

"The market may crash at any time," said Liu Xiaodong, executive vice-president of the Shanghai Stock Exchange. A slide would be "a major problem for us", he said, "because we do not have hedging mechanisms in place".

Chinese foreign-currency shares, known as Class B shares, surged after the government scrapped limits on ownership by an estimated 50 million local investors. B share indexes in Shanghai and Shenzhen have more than doubled since the rules were changed on Feb 19, even as analysts warn weak earnings don't justify such gains.

Mr Liu, speaking at a Shanghai conference sponsored by the Economist Group, said the nation's stock markets are booming "because there is too much money in the country with very few investment opportunities".

Chinese stock markets, including B shares and Class A shares denominated in yuan and off-limits to foreigners, are now worth about US$540 billion (S$950 billion), according to Bloomberg Analytics. Class A shares alone are worth US$530 billion, up from US$235 billion in 1998 and just US$160 billion in 1997, according to UBS Warburg.

Granted, the government has numerous tools at its disposal to prevent its markets, Asia's second-largest, from sliding as fast as they gained. With the inflation rate at less than 2 per cent, it has room to cut interest rates, for example, said Joe Zhang, UBS Warburg's head of China research.

"I'm not saying it will go higher because it's already expensive," Mr Zhang said. Mr Liu's views may not be representative of the government because officials are capable of "dampening speculation without killing the market".

Mr Liu's comments did little to dissuade investors yesterday. Shenzhen's B share index rose 2.7 per cent to a record, rounding off a 100 per cent gain since the government rule change. The Shanghai B share index, down 1.5 per cent yesterday, is up 62 per cent.

Mr Liu didn't go so far as to predict that stocks, which can rise or fall only 10 per cent each day, are poised to fall anytime soon. Yet he warned investors away from the B share market because stock prices bear little relationship to underlying earnings.

Even if a company is unprofitable, "the investors believe that the government will save that company and not allow it to go bankrupt," he said. "That is why foreign investors must be careful when they enter China's stock market."

In the meantime, he said, the Shanghai exchange plans to introduce futures and options contracts, so that "investors can still make money or protect against losses if the market goes down".

Some local traders praised Mr Liu's comments, though only if they result in new rules to protect investors. "New financial products are good," said Yao Maogong, chief trader at Shanghai International Trust & Investments Corp. "But the regulator should address the market irregularities first."

The Shanghai exchange also plans to step up efforts to expel unprofitable companies from the exchange, Mr Liu said. About a dozen are already targeted for delisting. "We've been talking about delisting these companies for years. We can't wait any more," he said.

Mr Liu said he is well aware that provincial governments may resist efforts to delist companies they control. One example: Chongqing Yu-Gang Tioxide Co, a chemical maker owned by the Chongqing city government, which has been unprofitable since 1996. "We can only hope that they consider the broader interest of the country's capital markets," he said. -- Bloomberg http://business-times.asia1.com.sg/5/news/nchin01.html

-- Carl Jenkins (somewherepress@aol.com), March 16, 2001