Investors pin hopes on Guo to reform stock trade
CARRIE Pan, a 29-year-old Shanghai accountant who has lost almost half the value of her portfolio since she began investing in Chinese stocks, is becoming confident again.
She purchased 1 000 shares of Yang Quan Coal in April to add to her 200 000 yuan (R267 000) in equity holdings. Her portfolio fell 40 percent last year, compounding her losses since she started buying stocks six years ago. So far, her latest pick was up about 4 percent through Tuesday.
“I believe stocks will rise,” said Pan, watching her holdings on a computer screen in her two-bedroom apartment on a recent afternoon of maternity leave. “Guo has already done lots of things to support the stock market since he took office, and he is very keen on improving the market’s performance.”
That would be Guo Shuqing, the 56-year-old head of the China Securities Regulatory Commission (CSRC), who took over seven months ago pledging reforms. Since then, Guo has taken action to increase the amount of stocks foreign investors can buy in the otherwise closed market, urged listed companies to pay more dividends to shareholders and changed the way initial public offerings (IPOs) are priced.
“Our current stage of work is focused on improving the fair play of the market, protecting investors’ legal rights and enhancing the ability of serving the real economy,” Guo said in a People’s Daily report posted on the securities regulator’s website in March.
“We’ll bring more market forces to gauge to-be-listed companies, reveal their potential risks and let more investors oversee pricing.”
The CSRC and the country’s two exchanges, in Shanghai and Shenzhen, have also announced plans to cut transaction costs for stock purchases and sales, and tightened accounting scrutiny on companies that are facing delisting.
The goal is to restore the vanished trust of a Chinese public that has taken a walloping in stocks and instead sought investment alternatives such as bubble-prone property and the world of underground lending, known as shadow banking, where risky and unregulated investments promise investors annual returns of as much as 100 percent.
“Guo is the man,” said Hao Hong, the chief China strategist at BoCom International Holdings in Hong Kong. “It’s a show of determination. It’s all about confidence building.”
Like Pan, millions of Chinese investors have watched their stock investments crash and remain mired in a two-year bear market.
The benchmark Shanghai composite index, after peaking at 6 092 in 2007 following a bull market, fell to just above 1 700 by the end of 2008. Four trillion yuan of government stimulus lifted the index to 3 471 in 2009. Yet the market fell another 33 percent in 2010 through 2011, dragging valuations to a record low of 8.9 times estimated earnings in January.
The Shanghai index is up 5 percent so far this year, even after falling 6.1 percent from this year’s high on March 2 amid concern an economic slowdown is deepening. The gauge dropped 0.1 percent to 2 309.56 yesterday.
China’s 50 million individual investors lost an average of 40 000 yuan last year, according to a People’s Daily report on May 9. That is almost twice the annual average disposable income of an urban Chinese. Those losses, exacerbated by IPO prices that tanked immediately after listing, companies’ reluctance to pay dividends, and speculative bets on smaller companies’ back door listings, contributed to equity flight.
Insider trading probes have also kept some investors away.
The securities regulator handled 39 such cases in the first 11 months of last year, the CSRC said in a statement last November. That was compared with 42 in the first 10 months of 2010, it said.
The focus on market oversight was still to prevent and crack down on insider trading, Guo said at a forum in the southern city of Shenzhen in December last year.
Police had detained a former fund manager at Bank of Communications Schroders Fund Management and the former chief power analyst at Citic Securities, the nation’s biggest publicly traded brokerage, for insider trading, the securities regulator said in statements on its website on May 23.
“Investors lost their confidence in the value of the market itself because they think this isn’t a market they can play in,” Wu Xuan, a Beijing-based strategist at Rising Securities, said in a telephone interview.
“What the new CSRC chairman is doing with his new policies is to let investors see hope again.”
On average 3 million new investors enter the stock market every year while millions have left or stopped trading after suffering heavy losses, a situation the regulator wants to curtail, according to a CSRC statement in April, citing Guo.
Guo, while heading the State Administration of Foreign Exchange (Safe) from 2001 to 2005, was known as a charismatic leader who handled relationships with other government departments to drum up support for reforms “with ease”, according to Hong Weizhi, a former Safe spokesman who worked with Guo.
Also a former vice governor of the central bank and most recently chairman of China Construction Bank, the nation’s second-largest lender by market value, Guo helped oversee the company’s $9.2 billion (R77.8bn) IPO in 2005. A fluent English speaker, Guo was a visiting scholar at Oxford University in 1986 and 1987.
“When he moves, he would follow one punch with another, with every punch hitting the right spot,” said Hong, who now heads the financial affairs office of the city of Kunming in Yunnan province. “That’s just his style, and he really knows what he’s doing. He’s done plenty of homework, having had a whole set of reform ideas in his mind since long ago.”
Reviving demand for equities among investors is important in a market where individuals own 26.5 percent of the nation’s stocks, compared with 15.6 percent by institutional investors and 57.9 percent by corporates, according to the CSRC’s investor protection bureau.
The property bubble that resulted from investors plunging into real estate as an alternative investment has driven up home prices by as much as 140 percent since 1998, threatening social stability. The price bubble has prompted the government to increase down payments and mortgage rates for home purchases in the past two years to curb rising costs.
Home prices fell in a record 46 of 70 cities tracked by the government in April from a year earlier, according to the statistics bureau.
“Bubbles in the property market have yet to be fully deflated,” said BoCom’s Hao. “Some of the funds may flow into the stock market from the property sector if the government continues to ease credit while keeping the curbs on home purchases.”
The government also wants to lure away money from the unregulated shadow-banking sector, where investors have sought to beat an annual inflation rate that kept pace with or exceeded the 3.5 percent interest rate paid on savings bank deposits. The sector is valued at $2.4 trillion by Yao Wei, a Société Générale economist.
Lawlessness associated with risky investments gone bad has led to scores of suicides, death sentences for those convicted of fraud, and pledges from Premier Wen Jiabao to bring shadow lending under government supervision.
Government policies have encouraged companies to seek funding from IPOs in order to reduce reliance on bank loans, which provide 72 percent of the nation’s credit.
To boost equity demand, the CSRC said on April 3 it would more than double the amount that overseas institutional investors can invest in Chinese securities to $80bn, while the foreign-exchange regulator said on May 20 that it would speed up the approval process.
Only approved institutional investors can buy or sell yuandenominated securities under the qualified foreign institutional investor, or QFII, program. Regulators had approved a combined $26bn in investments for 138 QFIIs as of May 8, according to Safe’s statistics.
Increasing the quota was “providing a signal of the government’s desire to expand the domestic market”, said Mark Mobius, who oversees $50bn as executive chairman of Franklin Templeton’s Emerging Markets Group. – Bloomberg