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Share sale plan viewed as benign to market
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CHINA'S domestic stock markets are unlikely to be seriously affected by the government's plan to sell more state shares to cover its social security funding gap, analysts said on Thursday.
If done at the right pace and price, analysts said, it could even help engineer a “soft landing” for the country's high-flying shares.
China's stock market investors have been anxious for several months as they awaited details on how the government will sell its shareholdings in listed companies.
The threat of a sudden flood of state shares has time and time again spooked market sentiment. State shares make up around two-thirds of China's more than US$550 billion stock market capitalization, dwarfing the number of shares that are actually traded in the market.
Finally on Wednesday evening, the State Council announced that it has approved a plan to liquify state shareholdings as a means to raise money for the national pension fund, which posted a 35.7 billion yuan (US$295.59 billion) deficit last year.
Based on the guidelines, all state-owned enterprises undertaking initial public offerings (IPO), both at home and abroad, must allocate 10 per cent of their proceeds to the national pension fund.
In the wake of the announcement local share prices didn't collapse. The major indexes, however, languished on Thursday mostly in negative territory, primarily due to a long overdue correction.
Analysts said the plan will force listing candidates to increase their IPO size so as not to affect their projected revenue from the share sale.
“But as you can see, subscriptions for IPOs are very, very strong (in China), so I think there's no risk in the IPO market,” said John Lu, chief representative of ING Barings Securities in Shanghai.
Analysts said there is a large pool of funds that invest purely in IPOs and cash in on the “pop” in the price during the first few days of listings.
Lu added that a larger IPO size is positive for the market, as it creates more liquidity for the shares.
Companies issuing additional shares will also be required to turn over 10per cent of their proceeds to the pension fund, the guideline added.
Other potential ways for the government to raise money, rather than through an IPO, are to have companies buy state shares from their parents and companies to issue more shares through rights issues. Such schemes will first have to be approved by the State Council.
Non-IPO schemes are “going to be on a much smaller scale though (than the IPOs), so I think the impact on the secondary market will be small,” Xu Jun, an analyst at Core Pacific Yamiichi Securities, said.
While the rules went into effect on Tuesday, the government didn't say when the sales will actually take place.
An analyst at a Singaporean brokerage house said he doesn't expect such moves to be implemented in the near term. “The government will try to defer using them. It won't happen in the near term.”
In late 1999 the government experimented with selling state shares and the results were dismal. The government tried to sell its shares in two companies - motorcycle maker China Jialing Industrial Co and Guizhou Tyre Co.
It put the offer prices much higher than what the market had expected, which triggered a selldown of the shares in the secondary market. That spilled over into the broader market.
The experiment to sell more shares of listed companies to the public was then abandoned, even if the government had already short-listed candidates to buy the stock.
This time, the sale is expected to be more gradual and the price setting mechanism more rational, analysts said.
“If the government controls (the sale) well, we will see a gradual soft landing of the market,” said Laura Luo, the Hong Kong-based head of China research at SG Securities.
China's domestic markets are among the best performing markets globally so far this year, primarily due to the abundant money supply stemming from the high savings rate in China. Valuations have risen to more than 50 times for many of the shares.
“The government will be more careful now, they will want to see how the market will react before proceeding,” Luo added.
With more than 1,000 companies listed on the domestic bourses, ING's Lu said that the government will probably sell its stake in 20 to 30 companies every year, dragging out the whole process for “at least 10 years.”
Core Pacific's Xu said large companies with good earnings potential will be prime candidates for state share sales. (SD-Agencies)
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