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Mainland Market Hits Two-year High
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Following the government's lifting of a one-year ban on share sales, China's stock market closed at its highest level in nearly two years yesterday.  


The benchmark Shanghai composite index closed 3.95 percent higher at 1,497.104 points which was its highest level since June 7, 2004 when it closed at 1,517.145 points. And the percentage gains on the first day after the week-long May Day holiday were the biggest since June 8, 2005.


Shares in commodities, real estate and the electrical power sectors saw a continuous increase on yesterday's market. Analysts predict the index will rise to 1,500 points in the coming days.


"In the past, the rise of A-shares were driven by increases in H shares," said Cheng Weiqing, an analyst with CITIC Securities. "But now I don't believe the climbing of the A-share index is much related to the rise of H-shares." 


The A-shares have been gaining in strength in a trend which has been buoyed by the government's  market-friendly measures introduced at the beginning of 2006.


The China Securities Regulatory Commission (CRSC) lifted the one-year ban on share dealing by issuing new rules on Sunday. They state that companies must meet 34 criteria to be eligible to sell stock, which includes three successive years of profit and dividend payments equal to at least 20 percent of income.


Compared to the old system, companies are now subject to tougher restrictions when selling shares. And share sales should not be bigger than 30 percent of a company's capital before the offering. Companies selling convertible bonds should cap their total debt after the sale at less than 40 percent of net assets as of the end of the previous financial year.


The new rules also tighten supervision on the management of raised capital and establish standards for private share sales before they go public.


Currently more than 200 companies from more than 1,300 listed firms are able to sell shares in the Shanghai and Shenzhen markets. Around 30 companies have submitted applications to the CRSC to float more shares.


The figures are encouraging for domestic securities firms as the lifting of ban immediately revived their underwriting business.


The ban on share sales in the Shanghai and Shenzhen stock exchanges has thrown securities firms into confusion since May 2005. Most of them have barely managed to scrape by over the past 12 months.


Some have been able to make an income by servicing listed companies converting non-tradable state-owned shares. But these profits are nothing compared to the income which can be generated by underwriting.


"A securities firm can get commissions of between 1.5 and 3 percent by underwriting new share sales but the profit from servicing listed companies to convert shares is only one-tenth of the underwriting business," Dong Chen, an analyst with CITIC Securities, told China Daily.


Up until April, 70 percent of listed companies had completed the conversion of their non-tradable shares into tradable units. With the lifting of the ban securities firms could shift their focus from reforms to the flotation of new A shares.


CITIC's Cheng pointed out that as nonferrous metals including copper, aluminum and gold would continue to climb, investors should also pay attention to the possible rise of steel and construction materials shares based on speculation that they'll recover from the slump.


China kicked off its securities reform and suspended simultaneously the launch of IPO and share sales on April 29, 2005. In 2006 A shares staged a strong comeback. The benchmark Shanghai composite index has increased 27 percent since the beginning of 2006.


(China Daily May 9, 2006)


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