Fresh investor confidence may lift China stock markets in '06

BT
Strong growth raises hopes for long-awaited turnaround

(SHANGHAI) Renewed confidence in stocks and an expected influx of new capital from institutional buyers will boost China's markets in 2006, building on a rally that has seen shares rise 13 per cent in the past two months, analysts say.

Retail investors are also expected to return to the market as worries fade over a plan begun last year to float US$250 billion worth of non-traded state shares in China's listed companies.

But those factors could be offset by any weakening in global demand for Chinese goods, and a resumption of initial public offerings, which were suspended in May to keep new shares off the market as the state share reform plan was rolled out.

'If the economy is reasonably good, the (stock) market should look quite interesting, particularly if IPOs could restart quicker, with better companies listing,' said Credit Suisse China strategist Vincent Chan.

China has been home to Asia's worst-performing stock market since 2002, with shares losing 24 per cent of their value over the four years even after factoring in the recent rally.

But with the economy chugging ahead at 10 per cent growth last year and 9-plus per cent expected in 2006, hopes are now high for a long-awaited turnaround in the Lunar New Year, the Year of the Dog, which began on Sunday.

'For the last three years we've been debating the whole share sell-off reform,' said senior economist Stephen Green at Standard Chartered. 'Now people are a lot more bullish. There is a sense that the worst is over.'

Last year, China's shares fell 8 per cent after Beijing unveiled its share reform programme and banned domestic IPOs. Some 339 listed firms joined the plan in its first seven months, accounting for a third of market capitalisation, media reports said.

Investors initially dumped shares but have begun returning to the market, lured by compensation packages and bargains.

Up until 2005, China's stocks were valued as high as 40 times earnings compared with Hong Kong's 15 times, but their sharp fall has wiped out the gap and they now hover at Hong Kong's levels. The benchmark Shanghai composite index is up more than 8 per cent so far this year.

The market will also get a boost from a large influx of new institutional money, from a growing pool of foreign investors, Chinese banks, insurance companies and pension funds that are getting broader access to the market.

Under its qualified foreign institutional investor scheme, China has permitted 27 firms, including Deutsche Bank and HSBC, to enter the market to date, with four more preparing to enter. The group has received approval to invest US$5.6 billion in China's stock and bond markets, but Beijing has said it is prepared to grant foreigners up to US$10 billion in quotas.

A growing number of Chinese institutional investors are also looking for ways to diversify investments and win bigger returns.

With the share reform programme well under way and a rally taking hold, talk has started to swirl that regulators could soon lift the freeze on IPOs. - Reuters