Beijing needs more market-friendly moves to spark rally

The Standard: In order to restore market confidence, the China Securities Regulatory Commission, in a sudden move last night, announced that effective immediately the offloading of tradable shares by controlling shareholders and cornerstone investors needs to be done through placement - not on the open market. Analysts said the move was read as a rescue measure to the slumping market and may spark a new rally in the domestic market today. "The offloading of tradable shares by shareholders should be done through an over-the-counter system, not in the secondary market, and upon approval of regulators," a CSRC spokesperson said.

"Shareholders need to announce their plans of offloading in the coming month if they hold more than 1 percent of shares." Controlling stakeholders cannot sell their shares 30 days ahead of a company's annual and interm reports, CSRC said. Shareholders who hold more than 5 percent should provide prompt notices and information disclosures. The move is aimed at moving closer toward international standards, where most overseas markets have similar requirements. "Prices would need to be negotiated between parties," the CSRC said.

During the first three months, the benchmark Shanghai Composite Index has plunged more than 34 percent from the end of 2007, and it further dipped more than 10 percent during last week amid tradable shares becoming available for sale in the secondary market. There have been mounting calls from retail investors that Beijing step in to restore the market by regulating mega share sales - especially by controlling shareholders - after Ping An (2318) planned its 160 billion yuan (HK$177.6 billion) shares sale in January. "The regulator wants the market to develop in a steady and healthy way, so setting up a system to monitor the selling of the abundant tradable shares is needed. Otherwise it will become an obstacle for market growth," China Securities News cited an unnamed CSRC source as saying yesterday. However, the rumored policy of imposing a special levy on early transactions has not materialized, as the state-run paper had reported. It was rumored there would be special levy imposed on those wishing to reduce their stakes within one year's time after the shares become tradable. The levy cost will become less if stockholders hang on longer, and they need not pay if shares are sold after eight years. The move was seen as a bid by the government to boost investor confidence. A large number of shares coming out of lockup has been among the factors blamed for the market's dismal performance so far this year.

MyTake: The market initially reacted positively as it opens up 6.8% on Monday, with investors buying large-caps such as Sinopec. The benchmark Shanghai Composite Index jumped to 3,305 points from 3,094 points at the close on Friday, which was down 49% from its peak in mid-October. However the euphoria dies down at the closing bell with the index closed just up 0.7% at 3,112 points. Although this latest regulating rescue measure move seems to be market friendly and is in part working towards international practices (eg 5% shareholder disclosure, off market platforms), it is also seen as moving away from international practices.(ie changing the rules of the game). Sceptics would argue why should there be a time frame or announcement on when to offload off market deals but no such thing is required when buying. I believe the off market platform would sufficiently serve the market well as all large selling/buying could be done without affecting the general market prices and sentiment. I am of the opinion that besides the above move, the Chinese markets need further market friendly interventions by the Government before any buying catalyst can be formed. Some of those catalysts could come from further proposal that State Pension Funds buying listed shares freed up by the expiry of lock-up periods (roughly about USD1,300 bil), further liberalisations of QFII Funds, reduction of transaction cost egs stamp duty etc and most importantly the start of monetary easing policies. Would this be the start to shore up confidence in the market before the start of the Beijing Olympics?

* The Beijing Olympic torch run started on April1, 2008 from Greece and covers about 137,000 km to continents across the world, including Malaysia and will arrive back in China on May 4. So far, there were a few big demonstrations during the run against China's human rights and Tibet issues in countries like the US, UK and France.