Twice Thinking of China's Booming Stock Market in 2006
The main index of China's stock market witnessed 127 per cent growth in 2006, and the total market capitalizationof the Shanghai and Shenzhen bourses reached over 8 trillion yuan (US$1.02 trillion), making China one of the best performing markets in the world.
Learning from the History of China Stock Market Growth
In the 50 years from 1949 to 2000, the Chinese securities market has experienced a lot of ups and downs: from temporary trails to denials, from restoration to full development. In June, 1949, the re-establishment of the Stock Exchange of Tianjin marked the formal start of the contemporary Chinese stock market. In 1956, after the completion of the socialist transformation from capitalist industry, the traditional socialist theories and planned economic system began to deny and reject the existence of securities market. It was till 1978, after the Third Plenum of the 11th CPC Central Committee's adoption of reform and opening-up policy, China's market once again gradually resumed its present form. Treasury bonds first issued in 1981 opened a new era of China's stock market development. Since then, the Chinese market, from small to big, hasachieved considerable development. Particularly in 1990 and 1991, Shanghai and Shenzhen stock exchanges were established; more rapid development of China's securities market was reached.
Also look at China's securities market in 1999, which reported a record turnover of 5.23 trillion yuan. The number of listed firms in the country rose to 949 by the end of the year. Capitalization of stocks reached 2.65 trillion yuan, up 36 percent from 1998. Newly-listed firms raised a total of 124.3 billion yuan from both domestic and overseas markets in 1999, 30 percent higher than in 1998.
The growth of China's stock market in 15 years time finished the 100-years development of a mature market economy, like UK or USA. Analysts say that the past decade experienced the most intensive and extensive reforms in the history of China's securities market, resulting in an improved regulatory system and a market-oriented appraisal system for initial public offering (IPO) as well as expanded capital supply to the market. The history of the rapid development of China's securities market is really impressive, but it is still a newly developed market. So there is a long way ahead for this market to be mature and stable.
China's Stock Market Hits New High in 2006
In 2006, China's stock markets swept away the slump of the past five years and put up a booming scene that deeply shocked the global financial community. The benchmark Shanghai Composite Index rose 1.81 per cent to close at 2479.73 points after hitting a record 2505.7 points during the day. The total transaction volume of both A and B shares reached 47.81 billion yuan (US$5.97 billion).
"The expected introduction of index futures at the beginning of next year and the corporate income tax unification are two factors that stimulating market growth," said Zhang Yidong, an analyst from Industrial Securities. Specifically, the introduction of index futures will attract flows of capital from institutional investors who will bid up before buying short in the futures market, while the unified corporate tax law will decrease the domestic company's tax burden and put them in a more faire platform to compete with the foreign-funded ones. According to a recent draft of the corporate income tax law, income tax will be unified at 25 per cent, which is lower than the current 33 per cent for most domestic and foreign-invested companies.
Meanwhile from the regulation standpoint view, The Company Law and Securities Law, coming into force on January 1, 2006, have brought about fundamental changes in the nation's capital markets due to a number of measures aimed at increasing corporate governance, creating more transparency, and putting more power in the hands of shareholders. "The two laws provided the foundation for the construction of China's comparatively underdeveloped capital markets," Cheng Siwei, vice-chairman of the Standing Committee of the National People's Congress, said at a conference held to celebrate the first anniversary of the laws' implementation in Beijing. "The principle that ‘every share should have the same right' in the two laws has provided a basis for ongoing securities reform," said Shang Fulin, chairman of the CSRC. "The laws are aimed at solving systematic problems that have kept the stock market in a four-year slump." Besides, China's economy continues to grow at a fast pace, which, in turn, can boost investors confidence in China's stock market. Big shares, like Bank of China, and Industrial and Commercial Bank of China, performed very well.
China's Stock Market in 2007
In face of the booming situation, people have different view of China's Stock Market in 2007 and its future. Optimistic insiders hold the view that: China's economy is in a special period of the economic transition from the conventional to the virtual. The next 20 years will be a golden era of the mainland stock market. The explosive rise of China's stock market in 2006 serves only a preheating period which indicates that the prelude of prosperity has been opened. "The expected appreciation of the renminbi will benefit industries like finance and real estate," said Liu Shiqiang, an analyst from Guotai Asset Management. And when large capitalization blue-chip companies like China Mobile, China Life and Petro China return from the H-share market in 2007, it will benefit the future listed company's profit growth.
However, the opposite ones think that the bubble of Hong Kong and Shanghai stock market bubble may have emerged in this regard. The bubble of Mainland stock market is because of its low loan-to-deposit ratio in the banking system as reflected by the excess liquidity that has caused the stock market to double. In the future, China's stock market may undergo a painful adjustment as happened in 2001. Cheng Siwei, a well-known securities expert, expressed his worry about some "hot-headed" investors. In his view, the quality and performance of listed companies is the cornerstone of a sound stock market, but now the total number of those investment-worthy companies listed in the stock markets in Shenzhen and Shanghai stock is no more than 400. "Without laying a solid cornerstone, even if the index is up to 4000, the bubble will eventually burst." In fact, the "polarization" feature of the present stock market has shown, to a certain extent, the lack of high-quality shares to invest in. Another aspect of the stock market "polarization" feature is that the stock market is affected by the fluctuations of a few “major” shares of giant “players”. The IPO of Industrial and Commercial Bank of China has already made a world record of IPO. For instance, large capitalization blue-chip companies such as Baotou Steel, Sinopec and Industrial and Commercial Bank of China could lead the increase of Shanghai Stock Market on Dec. 26, 2006. Logically, their sharp down also could cause its going down. This is not a good sign for a healthy market.
As the new year of 2007 has come, the whole picture of China stock market still looks appealing. But whether you are confident in or showing uncertainty of investing in China's stock market, better give a twice thinking of it. (Source: china daily, china youth daily, people's daily, 163.com)
Appendix Ⅰ.
The following data is taken from: www.sse.org.cn
Shenzhong Stock Exchange Market Overview 2006
Value
Change (±)*
Change (％)
SSE Composite Index
550.59
271.85
97.53
SSE Component Index
6,647.14
3,783.53
132.12
SSE SME Composite Index
2,493.26
1,077.61
76.12
SSE B Share Index
433.32
237.70
121.52
No. of Listed Companies
579
35
6.43
No. of Listed Securities
768
60
8.47
Stock Issued Capital (100 Mil.)
2375.83
242.18
11.35
Stock Negotiable Capital (100 Mil.)
1176.9
242.60
25.97
Stock Market Value (100 Mil.)
17791.52
8,457.37
90.61
Stock Negotiable Market Value (100 Mil.)
8575.31
4,699.40
121.25
Average share price (RMB Yuan/share)
7.49
3.11
71.19
Average P/E ratio
32.72
16.36
100.00
No. of Investors (in 10 thousands)
3,812.03
274.96
7.77
Annual stock traded in value (100 Mil.)
32,652.29
20,284.92
164.02
Annual fund traded in value (100 Mil.)
978.3
783.63
402.54
Annual bond traded in value (100 Mil.)
149.04
-79.46
-34.77
Annual warrant traded in value (100 Mil.)
4958.46
4,532.99
1,065.42
Annual funds raised by stock (100 Mil.)
490.02
459.73
1,518.01
Annual stamp tax (100 Mil.)
64.66
39.06
152.56
Increase of No. of investors
(in 10 thousands)
284.16
212.43
296.16
* Change (±): Compare with year-end data of 2005.
Shenzhong Stock Exchange SME BOARD OVERVIEW 2006
Value
Change (±)*
Change (％)
SSE SME Composite Index
2,493.26
1,077.61
76.12
No. of Listed Companies
102
52
104
No. of Listed Securities
102
52
104
Stock Issued Capital (100 Mil.)
143.21
87.06
155.07
Stock Negotiable Capital (100 Mil.)
54.68
32.48
146.27
Stock Market Value (100 Mil.)
2,015.30
1,533.74
318.5
Stock Negotiable Market Value (100 Mil.)
723.63
538.33
290.53
Average share price (RMB Yuan/share)-
14.07
5.49
64.07
Average P/E ratio
42.03
17.54
71.62
Annual stock traded in value (100 Mil.)
3,071.55
1,872.97
156.26
Annual funds raised (100 Mil.)
179.27
150.18
516.36
Annual stamp tax (100 Mil.)
6.07
3.65
151.11
* Change (±): Compare with year-end data of 2005.
Appendix Ⅱ.
The following data is taken from: www.sse.com.cn
The main index of China's stock market witnessed 127 per cent growth in 2006, and the total market capitalizationof the Shanghai and Shenzhen bourses reached over 8 trillion yuan (US$1.02 trillion), making China one of the best performing markets in the world.