China Is Said to Consider $15 Billion Bailout of Stock Market
China is trying to restore confidence in the Shanghai Stock Exchange and other markets.
By DAVID BARBOZA
Published: June 15, 2005
SHANGHAI, June 14 - The Chinese government is considering creating a $15 billion fund to help bail out the nation's ailing stock market, according to a senior government official and people told of the proposal.
The creation of a huge fund to invest in mainland stocks would be the government's most striking effort yet to prop up share prices and try to restore confidence in a market that has fallen to its lowest level in about eight years.
The proposal comes at a time when China's economy is sizzling hot, but the nation's Communist Party leadership is struggling to fix a stock market that has been broken for several years.
The Shanghai and Shenzhen stock exchanges, where about 1,400 state-owned companies are listed, are each down 40 to 50 percent from the highs they reached in 2001. In recent months, struggling brokerage houses and large investors have been aggressively lobbying for a government bailout fund.
Government bailouts have a weak track record, however, and the proposed support is unlikely to nurse the growth of the capital markets here. When authorities in Hong Kong and Tokyo stepped in to aid their local stock markets, the moves only provided a short psychological lift and failed to produce a sustained turnaround.
Analysts say the government is considering the huge bailout proposal because the market has fallen so sharply in the last year that some government officials fear a bigger drop could seriously impede the long term development of China's financial markets.
Indeed, China's weak system for raising money and putting it to profitable use is not just hurting investors and state-owned companies, experts say. At the heart of the problem is that private companies, which have a much better track record, are not allowed to list on the Chinese stock exchanges.
"China needs a healthy capital market," said Zhou Chunsheng, a professor of finance at Guanghua School of Management at Beijing University. "Traditionally state-owned companies found it easy to get financing from state-owned banks. But now we have more small businesses and private businesses. And they have to find ways to get financing."
Some Chinese officials say they are motivated in part from fears that huge and mounting investor losses could also create social discontent among the millions of people who began buying shares in the early to mid-1990's, when stock prices were climbing.
While it is not clear whether China's leadership will ultimately approve the bailout proposal, expectations that the government is about to act helped lift share prices last week in one of the biggest one-day rallies in three years.
If the $15 billion investment fund were created, the size of the fund would represent about one-tenth of the current value of the stock market's floating, tradeable shares. But some analysts say that turning to a bailout fund could make the situation worse by encouraging investors to sell more of their stocks, saddling the government with huge additional losses.
"If the government really wants to do something they should try some other measures instead of simply pouring more capital into the market," said Qian Qimin, a senior analyst at Shenyin & Wanguo, a brokerage house based in Shanghai.
The government has turned increasingly aggressive in its efforts to restore investor faith in the market. Nearly every week, regulators announce a new initiative aimed at shoring up the slumping market.
On Monday, for instance, the government said that it would offer loans to two major brokerage houses. Regulators have also said they plan to reduce taxes on stock sales and give listed companies the right to engage in stock buybacks.
The government has also reduced transaction costs and allowed insurance companies and the government pension fund to invest.
Even more, foreign investors who need special approval to buy shares inside China have been given greater access to the domestic stock market.
Regulators have also introduced new corporate governance rules, cracked down on accounting fraud and closed some corrupt and insolvent brokerage houses.
Despite such efforts, stock prices have continued to slide.
Last week, the Shanghai exchange index dipped below 1,000 points for the first time since 1997, crossing what many investors considered a crucial technical and psychological trading level.
Then, last Wednesday, the stock exchange suddenly jumped 8.2 percent on rumors that the government might bail out state-owned brokerage houses or create the bailout fund big investors have been advocating in recent months.
Trading has been flat to down slightly since then.
"It's very hard to estimate the future of the stock market because the market is often interfered with by the government," said Mr. Qian at Shenyin & Wanguo Securities. "How often the government will take administrative measures and how effective these measures are will decide whether the stock index will rise or fall in the future."
China opened its two stock exchanges in 1990 and 1991 as a way to help state-owned companies raise money and to create a foundation for a thriving capital market system.
For several years, prices rose steadily as millions of investors bid up the shares of state-owned enterprises, raising billions of dollars for those companies and helping alleviate pressure on the already struggling state-owned banking sector.
But since late 2001, the stock market has been tumbling amid allegations of accounting fraud, poor corporate governance and continued government interference in business operations. On top of that are fears that regulators might allow some of the state's huge holdings in legal, nontradeable shares (which represent more than two-thirds of the market's value) to be released into the market, further depressing prices.
The market has also soured on initial public offerings. In 2002, the Shanghai Stock Exchange raised about $6 billion through such offerings, slightly more than the longer-established Hong Kong Stock Exchange.
But in the two years since then, Hong Kong has raised close to $20 billion through initial public offerings compared with just $9 billion in Shanghai. And this year is expected to be no different, with all the big Chinese companies deciding to raise the bulk of their money in Hong Kong, not Shanghai.
Few are optimistic about the stock markets' prospects over the next year.
"In my view the stock market is still overvalued, even after falling 50 percent," said Joe Zhang, an analyst at UBS. "We were paying way too much for stocks back then. And we are now beginning to realize that what we bought was not BMW, it was Xiali Automobile."