Unpredictable year ahead for stock market
It is no longer a question of optimism or pessimism.
The movement of the stock market in China simply seems unpredictable.
With the bear roaring in the bourses for three and a half years, the biggest concern for the country's around 70 million stock investors is whether 2005 or 2006 will see a revival of the market's fortunes.
But performance in the first few days of this year still remains far from encouraging, with the first trading day of 2005 - January 4 - seeing the benchmark Shanghai composite index closing down 1.9 per cent at 1,242.774. In 2004, it had plunged by 15.4 per cent, with each stock trading account suffering an average loss of more than 2,000 yuan (US$241.5) in the year.
Even securities analysts and experts who used to offer annual predictions of the direction that the market would take in the year ahead appear lost.
"I do not feel optimistic about this year's market performance," said Zhu Jianfang, an analyst with China Securities Co. "We have yet to find something that is strong enough to consistently drive up the indices."
Cao Fengqi, director of the Finance and Securities Research Institute at Peking University, also found it difficult to predict market trends.
"I am neither a pessimist nor an optimist," he said, "I still see some hope with the bourses, with the biggest one coming from the robust Chinese economy, but it will not be easy for this to become a reality."
Then what exactly is wrong with China's stock market?
It is not a result of insufficient government support.
On the contrary, with the issuing of a nine-point guideline document by the State Council to support the development of the capital market last February, the government made many more pledges to reform the bourses over the past year than ever before.
Special panels were established in relevant departments throughout 2004 to implement the proposed reforms. A new co-ordination channel between three financial regulatory bodies was put in place.
The small and medium-sized enterprises board was opened in Shenzhen to facilitate the listing of smaller companies. The stock issuing system was upgraded to ensure that public offerings reached more reasonable prices.
Securities companies were allowed to issue bonds and increase short-term financing with banks. And fund companies had their mutual fund products approved much faster and easier than previously.
Insurance and pension funds got wider access to stock investment, providing a fresh source of funds. And investors' deposits were better protected.
All of last year's reforms seem to be positive news that should have made the stock market turn around.
But apart from short-lived rebounds, the market gave a cold shoulder to the stimuli and ultimately headed south.
Has the stock market simply lost its attraction to investors?
The root cause of ailing investment confidence is that there is very little or even no return for investors, said Cao.
For more than a decade, many listed companies have regarded the bourses as cash cows and did not care about investor sentiment - rarely paying dividends and often providing fake information.
Cao pointed out that the market remains weak as the mechanism for protecting investors' interests has yet to be fully established.
It has been suggested the role of the market be defined as a venue for investment, rather than a place to raise funds. And listed companies should create fortunes, not just for themselves, but for the public investors too. Regulators have started to make progress in this regard.
However, the biggest obstacle confronting the implementation of all the reform plans is the bourses' split share structure.
The fact that about two-thirds of the shares of domestically listed companies are non-tradable and lying in the hands of the State has left very little room for public investors to improve their situation.
The existence of these non-tradable shares, a result of the planned economy, have offered the actual controllers of the listed companies more of an advantage than public investors in terms of the disposal of the money raised from the stock market and meant they were subject to less public scrutiny and competition.
Realizing these flaws in the system, regulators are looking for ways to gradually reduce and float these shares, but it is hard to find a solution that will please everyone.
This reform to change the market structure and fundamentals will prove to be long-term and arduous.
The State Council guidelines issued last year have corrected some wrong thinking about the role of the stock market and mapped out new prospects, so investors are a little more hopeful, said Li Qingyuan, director of the research centre of the China Securities Regulatory Commission (CSRC).
But implementing the guidelines is another matter, she said.
"We have to arrange all the reform plans in the order of their priority. We have to figure out what is most important and has to be solved first."
The solution of the irrational share structure is obviously the top priority, and the interests of public investors have to be keenly protected, she said.
Li, claiming that she was only giving her personal opinion, not speaking on behalf of the regulator, made these remarks at the Ninth China Capital Market Forum held in Beijing last Saturday.
She had made similar remarks a year ago at the same forum, but unfortunately not much has changed since then. And it remains questionable whether some breakthroughs will be made this year.
Regulators, however, have hoped the new year could be a new starting point.
"We have to see the challenges and the opportunities," Shang Fulin, chairman of the CSRC, said at the commission's annual work conference earlier this month.
The strong Chinese economy and its integration with the global economy require a faster development of the capital market. And more foreign investors investing here.
He said the commission would focus this year on the market's infrastructure construction, from improving quality of the listed companies, enriching product diversity to better protecting investors' interests.
Expected tax reduction, withdrawal of more poor-performing listed companies and securities houses and the establishment of a securities investor protection fund may bring better times to the stock market.
But many still doubt whether these measures would really rescue the bourses and investment sentiment.
The systematic flaws in the stock market have to be repaired to revive the market, said Wu Xiaoqiu, director of the Finance and Securities Institute at Renmin University of China.
It will cost a lot of money and energy, but it has to be done, or the system will fall, he said.