Shanghai B shares retreat as quickly as they ascended

Government meddling in the market has led to disruption because investors say regulators are lacking in experience and finesse


Wed, Aug 08, 2001 - Page 19

Chinese ``B'' shares, stocks denominated in foreign currency whose world-beating rally briefly captured headlines earlier this year, are in the midst of a retreat nearly as swift as their celebrated ascent. As with the rise, actions by the government are behind the fall.

The downdraft has spread to the larger stock market, raising concerns that a market crash could slow the growth of China's most competitive companies -- which depend on the markets for capital -- and crimp the recently revived consumer spending that is helping to support China's economic growth. China's economy grew nearly 8 percent in the first half of 2001, bucking the global economic slowdown.

Chinese state news media have carried articles assuring investors that the slide in share prices is "normal," but no hint that the government will soon move to to boost prices, as it has in past slumps.

B shares, originally created for foreign investors but opened to Chinese citizens as well in February, posted their biggest one-day drop in four years in Shanghai on Monday, closing at a 52-week low, and were nearly as weak in Shenzhen. Indexes tracking B shares were among the world's worst performers in July.

Monday was also unkind to A shares, denominated in yuan and reserved for Chinese investors; they have now fallen about 15 percent since the end of June.

Market professionals said the government was to blame, for fitfully introducing reforms without a consistent underlying policy that would build investor confidence.

"The opening of the B-share market to domestic investors was just one strike," said Jin Guanfeng, an analyst at Haitong Securities in Shanghai. "Then there was no subsequent action."

The greatest complaint is that the government failed to prepare domestic investors for the opening of the B-share market, which came without warning and without first improving the quality of listed companies. As a result, a torrent of money poured in from individual investors, driving up the valuations of companies without regard to quality.

The average B share now trades at 58 times last year's earnings, compared with a multiple of 50 for A shares and just 16 for companies listed in Hong Kong. Earnings among B-share companies, meanwhile, continue to be disappointing.

The government pricked the market bubble in May when it said it would begin selling state-owned shares to raise cash for social welfare programs. The sell-off accelerated when the government said last month that it had begun investigating the widespread but illegal use of bank loans to finance stock speculation.

Analysts estimate that as much as 600 billion yuan (US$72.49 billion) borrowed from banks might be tied up in the stock market; if a government crackdown forces the unwinding of those investors, prices are likely to fall further.

A glut of new share issues is making matters worse. On Monday, Shanghai Pudong Development Bank and Shandong Zhonglu Oceanic Fisheries added their names to a list of 30-odd companies in the last six weeks that have announced plans to list shares in Shanghai or Shenzhen.