Chinese equity reforms takes one step forward, one step back

SHANGHAI: China's market reformers struggle against the perception that Chinese stock markets are driven by policy speculation instead of fundamentals, but the role administrative edicts played in the recent rally highlights how hard it is for regulators to leave equities alone.

Guo Shuqing, head of the China Securities Regulator Commission (CSRC), has said he wants to make mainland equities markets more efficient, more transparent and more trustworthy. Beijing wants Shanghai to become a global financial hub to rival Hong Kong and New York.

But as Chinese stock markets looked likely to close out a third year in the red in 2012, even as China handed over power to a new generation of leaders in November, it appears pressure to meddle became irresistible.

"Guo had tried to use international practices to boost the market, but reforms alone cannot reverse lingering weakness in the short term," said Zheng Weigang, a senior analyst at Shanghai Securities.

"Now he is under pressure to invigorate the stock market at any cost, because the government is eager to list more private firms to help with economic structural adjustments."

In the beginning, it seemed like Guo hoped that reform alone would be enough to salvage equity indexes.

Within months of assuming his position at CSRC in 2011, he initiated a series of steps to clean up the market, including a clampdown on insider trading.

But the market continued to slide. Chinese equities had gotten too much juice as funds distributed through stimulus spending found their way into stocks in 2009, causing the main domestic index to jump 80 percent in that year.

Markets steadily declined from that peak since. Investors considered news of industrial overcapacity, high debt loads and shrinking demand from trade partners, and saw few reasons to stay in the market, no matter how loudly Guo committed to cleaning it up.

Even Guo's arguments that Chinese "blue chip" stocks were trading at record-low valuations fell on deaf ears.

At last, the CSRC gave investors what they wanted: more meddling.

One key step that investors had been publicly petitioning for was a suspension of initial public offerings, which many argued was diluting the market and driving down valuations.

After publicly sticking to its guns all summer, the CSRC finally quietly suspended IPOs in November, and then announced it would halt all IPOs until at least March to reexamine the 800-plus long queue. Regulators encouraged firms waiting to list to consider alternative sources of funding, like bond issuance, and at the same time lowered a few administrative barriers to listing overseas.

These signals coincided with an explosive rally that began in early December that saw the Shanghai Composite Index jump 25 percent by Monday's close. Some analysts now expect the rally to continue until IPOs are allowed to resume in March.

Guo may have added fuel to the rally by stoking expectations that authorities would drastically open up channels for overseas fund inflows into Chinese stocks.

Some analysts said that the sudden rebound of shares in banks and insurance companies was not due to a newfound appreciation for value investing but rather the result of domestic investors positioning themselves in advance of a tide of foreign money expected to flow into such stocks.

LESS THAN NO INTERFERENCE

"Don't forget China is a developing country. Its stock market is immature. Administrative interference is necessary in crucial times," Guo said at a recent stock supervisory meeting.

Guo added that he hoped to gradually reduce the incidence of such interference in the future, but he will continue to struggle against the reality that at present, many Chinese investors regard such intervention as benevolent and necessary.

"All is really good now; recent measures have caused investors to look at the market in a positive light," said Xian Qimin, deputy head of research at Shenyin & Wanguo Securities.