What is wrong with the Chinese stock market? After a whole week of tumbling, the Shanghai Composite Index reached its yearly new low last Friday.
The fundamentals of the economy are not as bad as the market may suggest, especially when the pressure of inflation seems to have temporarily eased a bit.
Even though we admit that inflation is going to be a long-lasting trend, it is a problem that all manufacturers in the world, and not just those operating in China, are facing.
Even the Sichuan earthquake, for all the havoc it has wrought, will inevitably contribute to a larger demand for investment. Nothing, to be sure, is to stop the economy's growth. In relative terms, China should have shown better performance than many other markets in the world.
These are simple facts, and they are so evident that it does not take investors a lot of studies to recognize them. But do the A-share investors appear reluctant to act accordingly?
One cannot help thinking that domestic investors cannot take the fundamentals wholeheartedly because there are other factors to disturb their psychology and erode their confidence. In fact, the same scenario had presented itself more than once. Whenever some giant State-sector company announced its IPO (initial public offering of shares) or new issue of stocks, the market started to fall helplessly.
Last October, when the market was at its historic high, it was the IPO of PetroChina, which raised an unprecedented 66.8 billion yuan, marked its turning point to a downward trend.
The A-shares' last tremor was reported following, among other things, Ping'an Insurance's announcement of its overly ambitious, and now aborted, new issue to raise 170 billion yuan.
This time, the yearly new low followed the announcement by China State Construction Engineering Corp's IPO plan to raise 42.6 billion yuan. Will the company go on with its plan? Investors have yet to be informed.
But why does the market react negatively to these large companies? Why are super-large companies likely to be killers of China's investment momentum rather than investors' favorite picks, as in other markets? Why do Chinese investors stage a virtual walkout whenever a major player is about to enter the game? Market regulators will have to ask themselves these questions rather seriously.
It is obvious that investors do not like to see the large companies set unreasonably high share prices and pursue immense fund raising plans with only scanty information about what they are going to do with their proceeds.
Nobody's money is cheap water. Large companies, especially those of the State sector, will have to learn to treat their domestic investors as respectfully as they treat overseas investors. And regulators will have to ensure that they do so.
Tradition is something very hard to do away with. For all the changes that China underwent in the last couple of years in its stock market reform, in which all formerly State-held non-tradable shares were made tradable, the market is still to complete its transformation from a semi-restricted State-sector companies' club into a truly open institution.
One symptom is that it is increasingly becoming a market dominated by industrial monopolies and some other very large companies. Investors have little control of their behavior, as consumers see little progress in their services no matter how much money they have raised.
If there are other good ways to invest one's money, why would anyone keep playing the dangerous game in the A-share market? Small wonder that despite all their enthusiasm for "stir-frying" stocks from time to time, Chinese investors do not usually have long-term plans.
At the same time, small but innovative Chinese companies (those featuring new technologies, for example) still prefer to raise capital from the overseas markets.
E-mail: younuo@chinadaily.com.cn
(China Daily 06/16/2008 page4)
