Chinese mainland stock markets might rally this year even as many investors remain jittery about lax corporate governance and policy uncertainties, according to today's Shanghai Daily.

 

Market watchers are optimistic that completion of the government's plan to transform state-held equity into publicly traded shares and other reform efforts will generate new interest in yuan-denominated stocks.

 

Indeed, the mainland's main stock indexes have gained more than 10 percent since the start of the year after losing half their value since their 2001 heyday.

 

"After a five-year plunge, we'll finally wriggle out of the pattern this year," according to Li Zhi, a Hualin Securities Co analyst. "Funds are expected to flow into the market as the result of expectation that the stock shakeup will create a better investment scenario."

 

China's mainland in May rekindled a twice-scrapped project to move as much as US$250 billion in mostly state-held equity onto the Shanghai and Shenzhen bourses, hoping to plug a shortfall in pension obligations. In the meantime, all initial public offerings were halted to prevent a stock glut.

 

The transformation, which could be wrapped up before the end of this year, initially sparked panic selling, driving indices down to eight-year lows. But the sell-off abated because large institutional investors held their positions.

 

"With the indices edging upward, retail investors will gradually return to trading," Li said. "Institutions such as insurers, pension funds and overseas banks will restore interest in the markets, partly thanks to low pricing and the country's economic boom."

 

The mainland's economy expanded 9.9 percent in 2005 and is forecast to grow at least 9 percent this year, boosting household incomes and consumer spending.

 

However, the central government's austere policies designed to rein in oversupply in some industries might still have negative effects on corporate bottom lines and export-oriented firms could face tougher trading environments given fluctuations in the yuan.

 

"Profits of Chinese mainland-listed companies might drop as much as 10 percent in 2006 due to the impact of macroeconomic measures," said Jiang Hui, a fund manager at ICBC Credit Suisse Asset Management Co.

 

Among other worries clouding the trading atmosphere are lingering uncertainties over the government's ability to shore up corporate governance at listed firms and the timetable for the resumption of new share issues.

 

The central government initiated a campaign last year to require state-owned companies to improve accounting standards, provide timely information disclosure and plow more profits into dividends.

 

Senior officials, including China's top securities regulator Shang Fulin and top state-asset regulator Li Rongrong, indicated that IPOs might resume this year and encouraged overseas-listed enterprises to pursue mainland equity sales.

 

"More detailed rules and measures are needed to beef up corporate governance," said Lu Chengde, a Guosen Securities Co trader. "Now investors are eager to know when new share sales can resume and whether big-cap companies traded overseas will come back."

 

To date, several Hong Kong-listed mainland enterprises, including top oil producer, PetroChina Co, have announced plans to issue stocks in Shanghai.

 

Among the other factors buoying optimism, analysts said capital available for investment in yuan-denominated stock, including contributions from mutual funds, insurers and foreign financial institutions, is expected to jump this year.

 

The mainland's insurance companies could invest as much as 150 billion yuan (US$18.6 billion) in the Shanghai and Shenzhen stock markets this year, up from 84.6 billion yuan (US$10.5 billion) at the end of last year, according to an estimate by China Life Insurance Co.

 

In addition, 25 finance firms controlled by the mainland's biggest state companies had 6 billion yuan (US$744.4 million) eligible for securities investments at the end of last year.

 

Overseas institutions have also been given more access to yuan securities after the government said last year it would increase the combined amount they can invest domestically to US$10 billion, up from an initial limit of US$4 billion.

 

The mainland has issued a cumulative quota of US$5.6 billion to 31 foreign institutions including Swiss bank UBS AG, Deutsche Bank and HSBC Holding Plc for investments in yuan-backed stocks and bonds.

 

UBS, Europe's biggest bank, is applying for up to US$500 million of additional quotas to invest in yuan securities, adding to its current US$800 million, said Nicole Yuen, UBS's managing director and head of China equities.

 

"We've received overwhelming demand from clients (to buy yuan-denominated securities)," Yuen said. "We'd like to apply for as much as we can."

 

At the end of last year, UBS remained among the top 10 shareholders in 24 companies listed in Shanghai and Shenzhen, which include industry bellwether Baoshan Iron & Steel Co and Shanghai Port Container Co.

 

Another major reason why overseas investors are optimistic about mainland stock is a "closing valuation gap between mainland-listed companies and Hong Kong-listed firms," said Vincent Chan, a China strategist with Credit Suisse. "You can find a smaller gap for bigger and better companies that boast good investment value."

 

(Shanghai Daily February 6, 2006)