Monday, October 03, 2005

Why Chinese Stock Market Is Not Looking Good (at least in the mid-term) ?


I took this view based on the following two reasons:

First, the big chunk of share of the publicly listed companies in China is still held by the State government, not in circulation. Sooner or later, the goverment will find ways to dump most of their holdings as SOE cannot be made profitable due to its distorted incentives structure. Currently, such experiment (of privitazation) is already under way. With vast shares dumped to the market, it will create an oversupply of the stock.

Second, thanks to the requirement of WTO and the trend of a less strict capital control, domestic investors, espeically those stuck in the stock market will find more channels to divert their investment to abroad. This create a shortfall of demand of the stock.

So what is the policy implication? Gradually release the state-owned share to the stock market and do it quickly only when the state-owned share of the economy becomes more insignificant, say under 15% of the GDP. Right now, the share is roughly 1/3.