The Mixed Own­er­ship Re­form Will Trans­form China’s Stock Mar­ket

CAIFU - - Contents - David Ren, Chair­man of CAIFU Mag­a­zine

Of­var­i­ous re­forms, the re­form of own­er­ship is the most fun­da­men­tal one. Any re­form that may in­flu­ence the own­er­ship sys­tem will have pro­found im­pact on the econ­omy and the so­ci­ety in the fu­ture. The mixed own­er­ship re­form will also bring great op­por­tu­nity to China's stock mar­ket.

Gov­ern­ment pol­icy, one of the most im­por­tant long-stand­ing fac­tors in China's stock mar­ket, played sig­nif­i­cant roles in China's ma­jor bull mar­kets and bear mar­kets in the past. To a great ex­tent, the full cir­cu­la­tion re­form start­ing from 2005 not only con­trib­uted to the bull mar­ket from 2005 to 2007, but also trig­gered the long bear mar­ket last­ing from 2007 to 2014. The bull mar­ket in 2014 is at­trib­ut­able to the pe­riod of mon­e­tary eas­ing whose be­gin­ning in the same year was her­alded by an in­ter­est rate cut. How­ever, the in­stru­ment of lever­age, which was cre­ated to­gether with the mon­e­tary eas­ing pol­icy, also partly led to the stock mar­ket crash in 2015.

The full- cir­cu­la­tion re­form it­self didn’t per­form well, even tak­ing the com­pen­sa­tion into ac­count. How­ever, the re­form was launched at a spe­cial time. Be­fore China’s ac­cess to the WTO in 2003, the com­mon con­cern was whether the prod­ucts made in China were good enough to com­pete against their for­eign coun­ter­parts. In 2005 it turned out that prod­ucts made in China be­gan to be preva­lent around the world, lead­ing to the pre­dic­tion of RMB ap­pre­ci­a­tion and in­flow of hot money, which caused the in­creas­ing RMB cir­cu­la­tion. Be­sides, China’s stock prices are sub­stan­tially un­der­val­ued af­ter years of bear mar­ket. The com­bi­na­tion of var­i­ous fac­tors fu­eled a round

of boom­ing bull mar­ket, push­ing the stock mar­ket in­dex from 1000 points to over 6000 points.

But in fact the full cir­cu­la­tion may be sub­ject to greater po­ten­tial risk, since it com­pletely changed the struc­ture of trad­able shares in China's stock mar­ket and its valu­a­tion. In ad­di­tion, the full cir­cu­la­tion raised the mar­ket cap­i­tal­iza­tion dur­ing the ini­tial stage for the pur­pose of sell­ing shares at a high price later. As a re­sult, even with no ma­jor set­back oc­cur­ring dur­ing the pe­riod from 2007 to 2014, China’s stock mar­ket in­dex plum­meted from 6000 points to 2000 points. In a word, the full cir­cu­la­tion both gave birth to the bull mar­kets and took 7 years to re­store the stock price to nor­mal lev­els af­ter the great bull mar­ket ended.

Fun­da­men­tally, the mixed own­er­ship re­form is ben­e­fi­cial to the stock mar­ket. Un­luck­ily, it hap­pened dur­ing an RMB de­val­u­a­tion pe­riod, cou­pled with eco­nomic ad­just­ment, de­te­ri­o­rat­ing ex­ter­nal en­vi­ron­ment, as well as the psy­cho­log­i­cal shadow of the af­ter ef­fect of a stock mar­ket crash with huge de­struc­tive power. Given the fact that the cur­rent ex­ter­nal en­vi­ron­ment will sup­press the per­for­mance of the stock mar­ket, it will take a long time for the sup­press­ing fac­tors to weaken be­fore em­brac­ing a new round of long-term bull mar­ket.

If there will be ma­jor ad­just­ment this year, even big­ger op­por­tu­ni­ties are ex­pected to emerge in a more vi­o­lent man­ner af­ter the ad­just­ment. Of course, maybe the bullish as­pect of mixed own­er­ship re­form will off­set the bear­ish as­pect of the de­te­ri­o­rat­ing econ­omy and ex­ter­nal en­vi­ron­ment. If there is no ma­jor ad­just­ment this year, then the stock mar­ket will ex­change space for time, re­plac­ing the over­all up­trend with lo­cal ac­tive hotspots.

In ad­di­tion to the ben­e­fits of the mixed own­er­ship re­form, the po­ten­tial nega­tive fac­tor is the reg­is­tra­tion sys­tem. Re­cently, new shares were is­sued so rapidly that the stock mar­ket has been sup­pressed. It is self-ev­i­dent that the reg­is­tra­tion sys­tem will deal a blow to shell re­sources and junk stock valu­a­tion.

In fact, the mixed own­er­ship re­form is ben­e­fi­cial to most state-owned en­ter­prises, many of which are blue chip com­pa­nies, while the reg­is­tra­tion sys­tem is mostly un­fa­vor­able for junk stocks in mid- and small-cap­i­tal­iza­tion stock mar­kets. With the mixed own­er­ship com­pleted, new im­pe­tus will be in­jected into the de­vel­op­ment of the state-owned en­ter­prises. How­ever, the theme stocks and shell re­sources will take a long time to em­brace the value re­gres­sion. There­fore, we can’t rule out the pos­si­bil­ity that new po­lar­iza­tion is likely to hap­pen in the stock mar­ket in­dex in the fu­ture.

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