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Investor moods sour as '2' slips to '1'

IN November 2011, when Guo Shuqing accidently fell at his first public appearance as new chairman of China's top securities watchdog, some cynical Chinese investors said the stumble was a bad omen for the flagging stock market. Their sarcasm may have been far-fetched, but their concern about the future of the market was not. The Shanghai Composite Index last week finally broke below the psychologically important 2,000-point level, delivering a 20 percent contraction since Guo took over the China Securities Regulatory Commission. The index closed yesterday at 1,959.77. That represented a 68 percent decline from the market's peak of 6,124 in October 2007.

Black humor greeted a composite index starting with the digit 1.

"I thought the market had fallen to the ground floor, but I didn't expect that there was a basement below," said one wag.

"I thought 2,000 points was hell, but it shows that there really are 18 layers in hell!" said another.

With few channels to invest money, many Chinese have funds in the stock market, so its decline is widely felt. An online survey by Sina.com found that 89 percent of 70,263 respondents, as of December 2, said they have lost money in the stock market this year, and 20 percent of them said the value of their trading accounts has evaporated more than 80 percent.

'Stuck market'

No wonder some people are saying the stock market has become a "stuck market." "You will become a millionaire by investing in Chinese stocks as long as you have 10 million in the first place," said one frustrated investor.

To his credit, Guo has tried to reverse the market's fortunes. He has initiated bold steps to crack down on insider trading and market manipulation, to weed out decaying firms, to tighten controls on backdoor listings, to urge companies to pay dividends and to open the door wider to foreign investors.

But Guo's reformist zeal has done little to pull the market out of its rut, and investor enthusiasm toward the reforms has waned into numbness.

To express their skepticism, some retail investors launched a petition last week asking Guo not to talk about the stock market when he delivered a keynote speech at a Beijing forum one day after the Shanghai market fell below 2,000.

Guo did manage one comment as he was chased by a media scrum: "I have confidence in the stock market." His faith certainly sounded a lot weaker than the bold pledges he made a year ago. The era when investors can be fooled by glib talk is gone.

The domestic economic slowdown, the European recession and sluggish growth in the US are often cited as reasons for the Chinese market's malaise. However, those excuses seem a bit feeble when investors consider the 17 percent surge in the Athens Stock Exchange in the past 12 months, despite Greece's persistent debt woes.

Moreover, China's economy has more than quadrupled since 2000, while the Shanghai benchmark now remains where it was at the start of that decade. Last month's upbeat economic numbers all pointed to a rebound in China's growth that has slowed for seven straight quarters, but they didn't stanch the market's biggest monthly fall in four months.

Apparently, it's not all about the economy. One explanation for the latest round of market declines is investor concern that a body of unlocked shares and a huge backlog of companies seeking IPOs will flood the market with too much stock.

An estimated 180.9 billion yuan (US$29.2 billion) of currently non-tradable shares of 96 companies will be released from lock-up periods on the Shanghai and Shenzhen exchanges in December - the biggest number since September 2011, according to Southwest Securities.

Meanwhile, more than 800 companies are lining up to launch initial public offerings on the two exchanges, according to the regulator. An oversupply of shares, said independent columnist Su Yu, will drain the blood from the equity market and worsen its illness.

Badly burnt

Chinese retail investors have been badly burnt by endless IPOs from companies eager to grab a slice of the profit pie at the expense of investors' interests.

In many cases, new shares hit the market with stunning first-day gains, then dive as IPO insiders cash out for quick profit, leaving individual investors holding the bag. According to Wind Information Co, 224 of 285 stocks that went public in 2011 were trading below their initial sales prices by the beginning of 2012, including 15 that slumped more than 50 percent.

The country's securities regulator has tried to tackle the issue by suspending IPO approvals. In the short history of China's equity market, the regulator has halted approvals seven times.

In order to tame inflated new share prices, the regulator now requires IPO applicants with price-to-earnings ratios of 25 percent higher than their listed industry peers to explain their pricing and disclose possible risks to investors.

But I fear that these efforts, however noble in intent, won't help improve market conditions substantially. Instead of focusing on fragments of the problem, a radical change in the entire unfair IPO pricing system is required.

China's IPO pricing mechanism now is largely regulation-driven rather than market-driven. IPO prices bear little or no relationship to underlying fundamentals of a company. New share prices are decided by issuers, underwriters and institutional investors, while retail investors who account for about three-fourths of trading on the domestic stock exchanges have no seat at the table.

Until the securities regulator takes the gloves off and tackles this root problem, it will be hard to see the composite index starting with the digit 2 anytime soon.


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