Bullish market

agldacheng

Once bitten, twice well, a little shy.

That's the relationship between Wang Yuan and shares.

The stock market has posted impressive gains this year, bucking a four-year trend, but the lawyer is not yet ready to be drawn in.

The scars still linger, Wang tells China Business Weekly he lost a third of his investment when he bailed out of the stock market last year.

On Friday, the Shanghai composite index scaled 1416.79 points the highest level this year but Wang fears there might not be much more upside.

He keeps a close eye on the rising stock indices but experience has taught him to be prudent.

Wang's cautionary tale is typical of Chinese investors who watched helplessly as the market went south over the past four years.

But the climbing index has seen a corresponding rise in Wang's confidence, and he is waiting for the right moment to buy.

This year, the benchmark Shanghai composite index has risen 20 per cent and the Shenzhen composite index has climbed 31 per cent.

Certainly, it has not gone unnoticed which is reflected not only in the rapidly-growing numbers of new retail investors. An average of 7,000 people have registered with the depository house each day this month, and foreign investors are showing keenness in A shares.

\"I have seen more than 200 institutional investors in the United States and Europe over the past two months, and they repeatedly expressed interest in A shares,\" Gong Fangxiong, director of JP Morgan's China research department, said earlier this month.

The securities regulator has surely sensed the public's surging confidence. As if on cue, it announced on April 16 that it would lift a ban on listed companies issuing additional shares on domestic exchanges.

\"We believe that the share conversion plan has gone smoothly and steadily and the issue of non-tradable and tradable classes of equity looks likely to be resolved soon,\" the China Securities Regulatory Commission said in a statement last week.
The measures, which aim to provide a healthy direct financing channel, as well as the opportunity for investors to enjoy the fruits of the rapidly growing economy through new listings and offerings, have been widely welcomed.
More than 30 domestic listed companies are ready to raise additional capital most likely before the end of the month. Overseas-listed companies such as Air China are also keen to return to the domestic bourse.

This renewed activity has raised fears among some that fresh capital-raising could pressure the market.

\"I believe the index will fluctuate due to the resumption of capital-raising, but on the other side, more and more capital is flowing into the market,\" says Cheng Weiqing, analyst with CITIC Securities. \"The extra capital will alleviate the pressure.\"

The other source of funds is capital from institutional investors.

At a macro level, the high liquidity in the money market, as well as rising personal and corporate deposits, provide more channels for money to flow into the capital market.

Large inflows from insurance funds are also expected. Until now, no more than 2 per cent of total insurance funds have entered the capital market, leaving a three percentage point space to expand to the 5 per cent limit set by the regulator.

There are also QFIIs, or qualified foreign institutional investors, which have shown great enthusiasm in the A share market. In acknowledgement, the State Administration of Foreign Exchange last week approved three more QFIIs to invest in yuan-denominated shares and bonds.

Up to April 14, China has approved 39 overseas institutions to invest a total of US$6.32 billion in yuan-denominated stocks and bonds.

Almost a year ago, China suspended share sales to prevent a flood of equity and started to convert about US$210 billion non-tradable State-owned shares of listed companies into stock that can be bought and sold on the market.

Since then, 768 companies accounting for 60 per cent of all listed firms and with a total market value of 1,280 billion yuan (US$160 billion) had completed the conversion of non-tradable shares by the end of March, paving the way to further improve corporate governance and operate in line with global standards.

The enactment of the securities law in January 2006 provides a foundation for listed companies to improve their corporate governance.

A series of rules and regulations by regulators and bourses have been announced, or will be soon, under the framework of the new law.

Among them are:

Allowing foreign investors to buy strategic stakes in listed companies' tradable shares, which could boost mergers and acquisitions, and in turn, drive listed companies to better management and performance.

The bourses, rather than the government, will decide whether companies qualify for listing, or whether to stop or suspend trading in their shares.

Public companies offering large loan guarantees for other firms will have to get the approval of at least half of the shareholders, which would curb financial risks for public companies.

For 15 years, the stock market has been seen as a source of funds for State-owned companies, including many struggling ones, and a way to release the banks from their onerous role as providers of cheap funds to government corporations.

Now, when all the shares are converted to tradable ones, survival of the fittest will ensure that companies improve their performance and deliver shareholder value as in any well-functioning market.