Facing the fireworks: restorative measures in China

Jul 01, 2008
<p>After its 2007 high, China's stock market has taken a huge dive, prompting regulators to implement a raft of changes to shore up investor confidence, with some signs of optimism</p>

For Chinese citizens, 2008 is likely to engender bittersweet memories in years to come. The year will undoubtedly be revered as the one when China showcased its rapidly amassing wealth and sophistication at the Beijing Olympics.

The Chinese government has gone to incredible lengths to make the event a success, moving factories, building entire transport networks and training its athletes – so it’s ironic that the year will also be remembered for things beyond the government’s control. It will be remembered primarily as a year of tragedy, when thousands of Chinese people lost their lives in one of the worst earthquakes the country has seen in years.

In economic terms the effect of the earthquake has been exacerbated by a marked decline in the value of equities over the previous eight months. The sheer number of China’s private investors means a great many ordinary citizens have seen the value of their investments decimated by the upward and rapid downward spiral of the Chinese market. The value of the stock market has fallen by more than 45 percent since October 2007, and some are suggesting things could get even worse before they get better.

There are an estimated 150 mn retail investors in China, many of them comprising an emerging army of private investors flush with confidence and money in their pockets. Such was the level of optimism in heady months before the downturn that people were leaving their jobs to become full-time investors.

Healing the pain
According to Merrill Lynch, prebubble, Chinese retail investors plowed around 22 percent of their capital into the stock market. With the fortunes of so many Chinese citizens so closely aligned with those of stocks, therefore, a collapse in equity prices means a lot of very unhappy people.

‘I’m surprised there hasn’t been more commentary about how ordinary people have been hurt,’ remarks Erik Floyd, former investor relations director at PCCW. ‘I wonder whether the reason why we don’t know more about it is because of the way the press is controlled in China.’

Even if the international press didn’t relay the disappointment felt by many domestic private investors, the Chinese Security Regulatory Commission (CSRC) did make a point of implementing a raft of changes aimed at restoring faith in the market and – crucially – upholding the commission’s mantra: ‘Investor protection is our top priority’.

‘The CSRC has amended some regulations to implement policy adjustments in order to address recent market issues,’ says Grant Zhang, deputy chief of corporate finance at Hong Kong, Shanghai and London-listed Chinese firm Datang International Power Generation. ‘And these will help to ensure stability in the mainland stock market.’

In late April the regulators took action to ‘regulate the centralized sales of stock shares’, the idea being to prevent significant block sales in the market. ‘The regulation on block trading was intended to shore up investor confidence and also ease ongoing investor concerns about oversupply in the market,’ explains John Ma, chief representative at Roth Capital Partners in Shanghai.

In a country where almost two thirds of companies are state-owned, a sudden government sell-off could fuel further fluctuations in the marketplace. Ma says investors will need more reassurance as the country moves from a state-owned system toward a free tradable model. ‘People worry that in a year or two there will – theoretically – be a large number of shares available for sale that will lead to oversupply, and this could depress the market,’ he adds. ‘Now the CSRC has issued these new rules on the volume you can buy and sell, it will go some way to easing concerns.’

The current climate has certainly kept the regulator on its toes. Hot on the heels of the block-trading changes came the slashing of stamp duty for transactions from a worldwide high of 0.3 percent back to 0.1 percent. The regulator initially raised transaction tax by 300 percent in an attempt to sedate the markets in boom time, but a recent slump has made a tax U-turn necessary.

Looking forward
Far from being perturbed by the bumpy markets, however, many in China are now feeling optimistic about future growth.

‘The adjustment is reasonable and allows the market and investors to be more rational, which may be good in the long run,’ Zhang points out. ‘Shareholders have suffered losses during the market correction period and this has hit market confidence, but some investors are now more confident about the healthy growth of the stock market in the long term as valuations of stocks are more rational now. In fact, as a power producer, we have great confidence in China’s economic growth, looking ahead.’

As well as shielding investors, the regulators are doing their best to make Shanghai the first-choice destination for PRC companies contemplating a foreign listing. The authorities have also mooted plans to open up the Shanghai bourse to non-Chinese companies, a move that may further jeopardize Hong Kong’s supremacy.

On the surface, it’s all smiles and talk of healthy competition. Ronald Arculli, chairman of the Hong Kong Stock Exchange, told a recent conference in Tianjin near Beijing that he regarded the competition presented by Shanghai ‘very positively’.

Behind the scenes, however, people think Hong Kong’s exchange is worried. Its recent decision to launch a more inclusive type of depositary receipt that can be used by countries currently unable to list in Hong Kong – such as Israel, Vietnam and Russia – could be an effort to stay one step ahead of the game.

Not everyone thinks Hong Kong has reason to be concerned, however. ‘Ever since the handover [of Hong Kong to China] there has been ongoing speculation that Shanghai was going to overtake Hong Kong, but you just need to look to Europe,’ says Floyd. ‘Germany is Europe’s biggest economy, but Frankfurt and Paris cannot replace London because of the tendency of the German and French governments to regulate and administratively guide those markets – and tax them. The communist party in China is even more likely to restrict the capital markets in China.’

Strategic advantages such as being free of Shanghai’s capital controls and the fact that China’s currency, the renminbi, is not fully convertible will ensure a continuing role for Hong Kong. The market benefits from its huge foreign exchange reserves, which make a London or New York listing less of an imperative. And bearing in mind the volume of private investors, when it comes to international fundraising, Hong Kong will continue to be the clear winner for years to come.

Whatever happens next, there is mounting evidence that IR professionals in China are becoming savvier than ever. ‘China is becoming increasingly focused on investor relations,’ says Zhang. ‘Unusually, the change in attitude is coming not just from companies and investors but also from the capital markets and the media.’

It may have been a difficult six months for China, but prospects remain staggering, and its attitude to best practice investor relations is admirably progressive for a market of its maturity. If anything, setbacks such as the country has seen are a key part of its education in the many perils and ultimate fallibility of the stock market.

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