China’s Reckoning Day On Stock Sales Appears Near
SHANGHAI -- More sellers than buyers in the stock market here earlier this week ignited a fire sale that caused shares to fall world-wide, a sign that China has joined the global market economy. Yet China's transition from communism to capitalism remains a work in progress, which could mean even more sellers in the months to come.
When China first permitted stock trading in 1990, it did so cautiously. It divided ownership of listed companies into tradable and nontradable shares, in part to keep the government in control of the companies going public. On average, just a third of each listed company's shares could be traded publicly.
The nontradable shares remained in the hands of a variety of big investors that often represented the state but which held back development of a Western-style stock market. Nearly two years ago, Beijing began overhauling the market to make all shares tradable. The key aspect of the highly complex process was that each company would permit the sale of previously nontradable shares according to its own timetable.
The plan looked smart at the time, pushing big risks into the future. The reforms were a key reason for last year's 130% rise in the benchmark Shanghai Composite index.
Now the day of reckoning appears imminent. The lockup periods for selling the nontradable shares are starting to expire. Investors in about 1,000 companies, holding shares valued at around 540 billion yuan, or $70 billion, will be eligible to sell by year end, estimates Zhang Gang, a Beijing-based analyst at Southwest Securities Co.
The huge gains in Chinese share prices over the past 20 months that pushed the stock market's overall value to more than $1.5 trillion appear to have encouraged parent corporations, state investors and other powerful institutions to begin taking advantage of their ability to trade and take profits on their investments.
Regulatory filings show more than a dozen big investors have sold shares in companies listed on the Shanghai and Shenzhen stock exchanges in recent weeks. The companies affected are those that had initially spearheaded the overhaul in 2005, a process that ultimately affected nearly all of the market's 1,400 listed companies. Because these institutions are the controlling shareholders in many Chinese companies, even small sales from insiders can rattle prices.
Indeed, some analysts say some such sales were a significant factor in Tuesday's sudden 8.8% plunge in the Shanghai Composite Index.
The plunge seemed to come unexpectedly. The week began with a surge of individual investor enthusiasm, in the first session after a weeklong break for the annual Lunar New Year. Monday, the Shanghai Composite Index was pushed to a record close, above 3000 for the first time.
Little noticed that day were terse announcements from institutional investors that they had sold shares in Citic Securities, Sany Heavy Industry Co. and other companies.
In one announcement that appeared deep inside Monday's Shanghai Securities News, Youngor Group Co., a big well-known garment maker, said it had pared an investment in Citic Securities, a Beijing-based brokerage. Despite the publication date, Youngor had actually dumped the shares before the holidays, the notice said.
"The market has been good recently, and the stock price [of Citic Securities] also rose, so gaining profits is one of the reasons," said Liu Xinyu, board secretary at Youngor. She pointed out the shirt maker sold only 30 million, or 1%, of Citic Securities and retains its place as the third-biggest shareholder with 154 million shares, or about 5%, of the brokerage. Youngor has no further plans to sell shares, she added.
As news of sales of shares in Citic and Sany filtered into the market, those shares faced significant selling pressure, albeit from high levels. Citic Securities, for instance, has fallen more than 10% this week although it is still up 28% for the year. The Shanghai Composite Index is now up 4.5% for 2007, after losing 2.9% yesterday to end at 2797.19.
Other off-loaded holdings in recent weeks include chunks of one of the country's main telecommunications equipment makers, ZTE Corp., plus investments in famous makers of wine and construction machinery.
These insider sales could mark the beginning of a profit-taking trend, so "this is a valid concern which could result in 'too much' supply," CLSA Ltd.'s China research chief Li Hui told her clients in a report.
The old share structure has been a nettlesome problem for China's market for years. The different classes of shares contributed to a mismatch of interests between small investors and the big -- often government -- shareholders who controlled listed companies. Holders of nontradable shares, for instance, had little incentive to take steps that might push the share price higher in the open market, since they couldn't themselves trade in the market.
There were always worries that big investors, especially the state, would ultimately try to sell. The kickoff to nearly five straight years of selling in China beginning in 2001 was concern that Beijing would permit sale of the nontradable stock.
The restructuring launched in 2005 was arguably the most ambitious single undertaking Chinese securities regulators ever introduced. But it also invited the risk that for the first time, big shareholders would have an opportunity to cash out of their investments, just like individuals.
To make the reform palatable to the public -- and avoid gutting a market that at the time was already in the doldrums -- the government built in delays in the complex process, preventing big shareholders from selling their newly tradable stakes for one to three years. The reforms have been well-received, and millions of new investors have been drawn to the market.
Not every big investor is expected to take advantage of rights to sell. Government entities, for instance, have little desire to lose control of the companies they own and most sales have been less than 4% of a company's value.
News that some institutional investors had taken profits came as a "shock" to the broader market, and future dissolutions could be a long-lasting risk for the market, says Jerry Lou, an analyst at Morgan Stanley & Co. "The correction is not done yet and it is too early for bottom fishing," he said in a report.
European Shares Continue To Slide on Global Factors
European shares continued their march lower, with global factors such as renewed selling in China, the state of the U.S. economy and the unwinding of a popular currency trade in Japan bearing down on the region.
Still, there is one local factor that some say helps explain why the region's indexes have been hit most of all the developed markets in recent days: European shares are expensive.
After four years of essentially rising prices, "Europe has been a big outperformer over the last few years and I think that has pushed it into expensive territory" compared with U.S. stocks, said Hassan Johaadien, a global strategist at Morley Fund Management in London.
Yesterday, the pan-European Dow Jones Stoxx 600 Index shed 0.9% to 361.79, its third straight day of declines. In the past week, many European indexes have given up their gains of the year.
In LONDON, the FTSE 100 index fell 0.9%, or 55.50 points, to 6116.00. It's now down 5% since Monday's close. Insurer Aviva led the decliners, after its operating profit missed expectations.
In TOKYO, the Nikkei Stock Average of 225 companies dropped 0.9%, or 150.61 points, to 17453.51, its third consecutive day of losses. Export-oriented shares fell on continuing concerns about the outlook for U.S. economic growth. Toyota Motor fell 2%.
In SHANGHAI, though the market was down, shares of Ping An Insurance (Group) Co. of China surged 38% during their debut, showing that local investors remain keen to invest in China's blue-chip issues despite the market's recent declines. Ping An's Class A shares ended at 46.79 yuan ($6.05) on the Shanghai Stock Exchange.
From: Wall Street Journal, By JAMES T. AREDDY
Date: March 2, 2007
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