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May 11, 2005

The Plan to Sell State's Interest in the Chinese Stock Markets

The broughouha receiving great wads of press this past week relates to the Chinese stock markets. In a nutshell, the 证监会 (China Securities Regulatory Commission) has apparently decided to implement a “reform” of the markets. Or at least they have decided to toe-test the waters.

As I answered in “Who Owns the Equity in Chinese-Listed Companies?” the state does, or at least, two-thirds of it. Last week, comes the report of an experimental program by which state holdings may, it is hoped, be successfully unwound. [Pay site. Registration required. Or see this page.]

To be fair, the program involves only four companies, heavily invested in by the state. Details of the rumored process by which the companies were selected may be found here. [In Chinese.] Proposed reasons for the selection:

对于已经公布的四家试点企业，华泰证券裴雷认为，这批公司尽管处于不同的地域，属于不同的行业，但它们至少有这样几点共性：

　　从规模来看，四家上市公司都不属于中央级的大型国有企业，而属于地方国企和民营企业。紫江企业、三一重工均为民营企业，其中紫江企业还是中外合资公司；清华同方和金牛能源则是地方性国有企业。从股权结构来看，四家公司的股权结构都相对简单，控股股东能够具有绝对的发言权。

　　而在股份类别上，四家公司均为纯A股公司，未含B股或H股。从经营业绩来看，四家公司自上市以来均未出现过亏损，且盈利能力较强。尤其是近三年来业绩发展持续稳定，显示出较强的行业竞争力。

In other words, the chosen companies are all profitable and competitive smaller, regional enterprises with uncomplicated stock ownership structures involving only A shares. So, is this an experiment representative of a sell-off of state interests in the market as a whole or more likely one conceived to please members of the State Council? [That was a rhetorical question.]

[Let me answer it.] This is a program designed to ensure the highest chance of success. Is it possible that the wider implementation of the sell-off has not yet been approved at the highest levels, but is dependent upon the success of this experiment? To what extent is wide scale implementation a certainty?

Yes, we are already reading the Chinese media play to the mass by portraying the program as the vanguard of a “total solution.” A Jiangnan Daily headline proclaims that “The State Council Has Now Become Directly Involved: The Problem of the Chinese Stock Markets to be Thoroughly Resolved.” But, in the past, the state has announced many programs with similar fanfare that have nonetheless died the slow death of wholesale inattention.

By the way, “unwound,” as I mentioned above, is the Financial Times's polite parlance for “dumped,” which I think, although a rude allusion to a garbage can, the more apt verbal selection. The introduction of an additional 200% of the outstanding stock to failing markets, already dead-swinging at a six-year low, can not possibly be a hopeful occurrence. If timing could be any worse, one could not think of it. But is any timing propitious for the offloading of more surplus shares than currently exist on the market, under business conditions at present in China?

The markets were designed with a fundamental flaw – massive state involvement -- in what became overvalued shares. Some have called for massive state injection of funds in the markets, which the magazine, “Caijing,” editorializes as “wrong headed” and “dangerous.” One doesn’t see how the Chinese state can save the day with any plan. It is a conundrum, with the only real resolution likely causing collosal damage domestically while baring the weaknesses of the Chinese economy to the world.

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