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China's G-share market poised for rapid takeoff

China could soon build a new share index made up exclusively of the state-owned enterprises that have come under the hammer of Beijing's reforms to sell-off the hundreds of billions of dollars in state owned stock, analysts say.

Adding to its A, B and H-shares, the so-called G-shares would be expected to incorporate listed companies that have resumed trading after winning government and shareholder approval for their plans to sell state shares, said Eliza Liu, associate director with Fitch Ratings.

A new index would help to differentiate domestic exchange performances, allowing investors and regulators to identify weaknesses and strengths as well as trends in the market, said Liu.

"The original A-share index is obviously not suitable in the current situation to give guidance on the overall direction of the market, so the new index is very necessary," she said.

China's main bourse uses the Shanghai Composite index, which includes both A and B-shares on the Shanghai exchange, as its benchmark.

A-shares are denominated in Chinese yuan and are open to domestic investors and qualified foreign institutional investors, while B shares -- once limited to foreign buyers -- are denominated in foreign currencies.

H-shares are the Hong Kong-listed shares of mainland companies.

G-shares, so dubbed to reflect the word "gaige" or reform in Chinese, would be made up only of companies that are well on their way to making all of their shares tradable.

Existing shares -- and the indices that track them -- are controlled by the state through stock held off the market, which means the indices provide a sizable weighting to shares that cannot be traded.

Since companies such as Baosteel have gained strongly after winning approval for their share sale plan an index based on such G-share companies makes sense, as it would more accurately track reforms, argued Tiger Tong, a senior analyst with China Knowledge,

"An index is useful in the initial stage of the experiment," Tong said.

Such an index could be composed of the 40-plus firms selected for the first two rounds of the pilot scheme, Tong suggested.

Once most companies sell off their state shares, the importance of the index would then decrease, he said.

Fitch Ratings' Liu believed such an index could become increasingly important as it takes in a growing number of listed companies as more firms follow the government directive to reduce the number of state-controlled shares held off the market.

"More and more listed companies will join the G-share board, so I think the new G-share index will be the new benchmark for the stock market," she said.

Under the non-tradable share reform scheme, the government wants to reduce its liability as the main stake-holder. Such action, it hopes will force companies to become more transparent, answering to stricter market-principles of shareholder demands.

It -- of course -- also wants to raise cash by selling off stock that is currently kept off the market.

Beijing initiated the long awaited reforms with two groups of companies and has now said that all listed companies should now develop plans to manage the sale of some or all of their state-controlled shares.

These plans include compensation packages for public shareholders who rightly fear that the value of their holdings will be diluted when the state dumps equity on the market, unless there is enough liquidity to soak up the excess stock.
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