Stock & Investment

Shanghai stock market opens to foreign firms

After almost two-year bull market, the benchmark Shanghai Composite Index, which tracks both A and B shares, recorded a dismal performance since October 2007.  In 2008, The Shanghai Stock Exchange (SSE) suffered an annual loss of over 60%, plunging from 4380 points to 1820 points and being the worst performing market in Asia.  SSE Governor Geng Liang and President Zhang Yujun attended SSE’s sixth annual Press Symposium early April, and Geng

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stressed that the primary mission of the SSE in 2009 is to maintain stability in market development.  Among the items Geng emphasized are trading seccurity and smooth operation of the market, the construction of blue chip market, market trading machanism, product innovation such as the SHSE-SZSE300 Index ETF as well as the bond market.  

Shanghai, a city historically with deep ties to the western world, has been an international business center, but the Chinese capital market in some ways is still relatively isolated from the international markets.  In late March, the State Council announced China aims to buildShanghai into an international financial and shipping center by 2020, and mapped out guidelines including more sophiscated investment products and favorable tax policies to attract international investors.  Under this plan, as the Cabinet said, Shanghai will build a multi-layered financial market system, promote the opening of financial services in the city, and ensure financial stability in the coming years.  Investors embrace the idea of buildingShanghai into an international financial center.  Responding to the news, the Shanghai indext was increased by 3.1% to 2361.70, and the last high point was 3.0% increase to 2389.39 on February 16.  On April 22 however, as energy companies and metal producers plunged, Shanghai key index dropped nearly 3% to dive below 2,500 points. The benchmark Shanghai Composite Index lost 2.94%, or 74.48 points, to close at 2,461.35 points.  On May 1, the State Council said foreign companies would be allowed to raise money through the Shanghai Stock Exchange and also to issue bonds in China.  For the first time ever, China will allow foreign companies to list in Shanghai in an attempt to turn the city into a financial center like New York and London.  See related article.

 


To nurture innovation-driven, mainly technology-related start-ups, China has cauciously developed Growth Enterprise Market (GEM), which is an experimental Nasdaq-style stock market.  Only more mature firms that have met requirements will be first listed.  GEM is planned to open on the Shenzhen Stock Exchange, as early as June 2009.  Shenzhen has traditionally been a test ground for new programs before they were rolled out to the broader market.  Investors are cautious but remain interested, with vivid memories of the 2006/2007 SSE’s over 300% gain as well as more than $3 trillion of loss in value from listed companies during the downturn; and it all happened when the Chinses economy still had a growth of 9% in 2008. 

A growth of about 8% is expected this year.  Investors keep a close eye on companies like Baidu (BIDU), China Mobile Ltd. (CHL), and both recently posted strong quarterly growth with warnings.  Baidu reported a better-than-expected 23.5% increase in first-quarter net profits, but warned the global downturn was affecting online advertising including paid search listings, keywards, and ads on Baidu's pages.  Holding over 60% of China's online search market share, Baidu, however, faces competitions from Google.  China Mobile had a 5.2% first-quarter net profit increase, but warned about its slowing subscriber growth.  On April 23, Baidu, the China search engine giant, has a market capitalization of 7.2 billion and a P/E ratio of 47.5x, and China Mobile, China’s largest provider of mobile telecom services,179 billon and a P/E ratio of 11x, although P/E multiples may not be as reliable in a downtime if forecasted earnings is used.  In the territory of wireless technology, China's Ministry of Industry and Information Technology estimates that 170 billion yuan, or about $25 billion, will be spent on 3G networks in China in 2009.  In 2009, China Mobile, will spend around 58.8 billion yuan, or US$8.6 billion in 2009 to build out its 3G network, while China Unicom (CHU) and China Telecom (CHA) will spend around 30 billion yuan, or US$4.4 billion each on building 3G networks.  Two companies that are worth menting are Huawei and ZTE, which are winning contracts as China rolls out its 3G wireless technology, and taking more market shares from their foreign competitiors. 

Looking into the IPO market, China Zhongwang Holdings Ltd., Asia's largest aluminum-extrusion manufacturer by capacity, plans to raise nearly US$1.6 billion as the world's biggest IPO so far this year.  Zhongwang makes products like window frames and train compartments, and the transport-related business accounted for over 40% of its revenue last year.  The railway component is an important part of this IPO as Zhongwang is likely to benefit directly from China's fiscal $586 billion stimulus and its planned spending of a third of the stimulus on railways, highways and power grids-related projects.  Zhongwang, which is based in Liaoning province in northeast China, is expected to list on the Hong Kong stock exchange on May 8, 2009.  According to this Wall Street Journal article, the Ministry of Railways' chief spokesman, Wang Yongping said that China wants to create an internationally competitive railway industry and to do that it will spend most of the money on domestic companies rather than buying from abroad.  Foreign investors are welcome, but as joint-venture partners for Chinese firms producing rail cars, Mr. Wang said.  To that extend, China’s government spending on infrastructure may have an impact on some foreign players, who are interested in expending their business in China.