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Outlook dims for China's stock markets

Non-tradable shares pose problem * The Shanghai Composite Index closed at an eight-year low on Friday, falling to 1,013.64. * Of the 1,200 listed companies, Beijing-owned shares account for 66 percent of the US$425 billion market capitalization. * Uncertainties over how the government will deal with the overhang have stopped the growth of China's bourses, despite strong economic expansion. * Analysts expect the declines to continue unless Beijing steps in to restore confidence.

The future of China's deeply troubled stock markets went from bad to worse this week, slumping to fresh eight-year lows as regulators' plans to solve the overhang of non-tradable government-owned shares heightened fears that more losses lie ahead.

The benchmark Shanghai Composite Index, which covers both A and B-shares listed on the Shanghai Stock Exchange, closed at a fresh eight-year low on Friday, down 2.43 points, or 0.24 percent, at 1,013.64.

It was the lowest close since February 24, 1997 after three consecutive sessions of losses that saw the composite trim 3.8 percent of its value.

Dealers said they expect the index to fall through the key technical mark of 1,000 points soon unless Beijing steps in with strong medicine to cure broken investor confidence.

In April, Beijing tentatively moved to prop up the beleaguered exchanges to not just halt the financial hemorrhaging but also as a first stitch in a wound that has been festering for years.

The China Securities Regulatory Commission chose four companies under which the non-tradable shares would be listed, and then announced this week it would select 10 more.

But at both junctures, anxious investors responded with more selling, as the Shanghai composite hit fresh six-year lows, before repeatedly tumbling to eight-year lows this week.

"The sentiment was so weak that the index has been falling really fast. Some companies' stocks even lost all of last year's gains in these several sessions," said Zhang Qi, an analyst from Haitong Securities.

It was not the first time that regulators sought a solution to the overhang, in which of the 1,200 listed companies Beijing owns a stunning 66 percent of the 3.52 trillion yuan (US$425 billion) of market capitalization.

Indeed it is these state holdings that has stopped cold the growth of China's bourses, quite the opposite of what would be expected in an economy that has been growing at more than 8 percent for two decades.

Regulators first tried to resolve the overhang of state shares in 2001 to raise funding for China's fledgling social security system but panicked investors sent stocks plunging, forcing authorities to abort the plan.

Since then, Beijing has repeatedly vowed to fix the problem but only soiled the wound by constantly balking at private and institutional investor demands that their interests be protected in any sale program.

The market last peaked at 2,245 points four years ago this month.

It was no surprise the markets continued an inexorable slide, said a Shanghai fund manager, who refused to be named.

"The market has been falling because the first batch of plans were really not that good. We don't think the next batch will be very good either," he said.

The reason China's stock markets are on the verge of collapse has to do with the original design and purpose of the nation's exchanges.

Fifteen years ago, the ruling Communist Party, looking for a way to avoid paying enterprises' heavy debts and fund a welfare system which once was the responsibility of chronically money-losing state-owned companies, struck on the idea of creating self-serving capital markets.

Wielding their party-approved quotas, provincial officials selected weak losers in hopes of clearing the mountains of debt built up in the days when workers were provided for from the cradle to the grave by enterprises.

The result: the bourses never functioned like Western bourses but rather as a policy tool of the government that bred rampant corruption and outright theft.

Although market players recognize that the state holdings must be disposed of, years of half-baked, non-committal government measures have made the average investor rightly suspicious.

"Investors couldn't help but doubt that this state share-sale plan is not something positive," said Yi Linming, analyst at Industrial Securities.
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