A-share market needs pricing strategy

12/17/2002
China Daily

For outside observers, the weird thing is that the mainland's A-share market continues to go down despite deepening economic reforms and the booming economy. But for mainland investors, there is nothing strange about it.

Unlike in mature markets, such as the US, there are bigger issues than just greedy CEOs and falsified financial reports. Nor can they be easily defined in right-or-wrong terms.

One of the bigger problems is the wide discrepancy between the price of tradable and non-tradable shares. Tradable shares are those issued to the public, and are traded in the stock exchange like in all other markets while non-tradable shares are a Chinese invention, supposed to represent the interests of the government, the initial financier of all State-owned enterprises, and those of the workers' community.

In the early days, this set-up seemed a perfect arrangement. The non-tradable shares were to represent the State ownership and never supposed to change hands. But it was perfect only in theory.

In practice, it has become unwieldy for the government to hold so many shares in so many companies. Even when shares change hands between different government entities, they still need to have a price.

But because the non-tradable shares were never in the market and there was a limited supply of tradable shares, the latter's price could swing wildly, the former always remained literally priceless - whichever price is assigned would be a wrong price.

Last year, when the government tried to exit its industrial holdings by using the price of tradable shares, the market tumbled because of increased supply.

Now, as the government is ready to transfer its industrial holdings to foreign investors at net assets-based prices, the market is sent to tumble again because the existing investors feel betrayed.

They were the first ones to pump cash into those SOEs during their IPOs but their overall return on investment did not even reach bank interest levels. So if there are any cheap shares to be passed around, they think they should be the first ones entitled, not foreigners.

We clearly see a loss of confidence, or a lack of a sense of basic security among mainland investors. Ever since the middle of last year, there has been a war, so to speak, going on between the investors and the government. If their fears are not alleviated, the government's exit plan might run into trouble.

Nor is this fear healthy for SOE reform. A foreign investor which takes over a public-listed SOE would not like to clash with a bunch of old investors at annual general meetings.

What the A-share market desperately needs is some sort of compromise to allow the government to exit at a price, or rather a way to calculate the price, accepted by most players in the market. Until that happens, the market just cannot really pick up steam.

Li Xinhong is senior analyst of Beijing-based Daton Securities.