2004-01-20 10:31:10
Gov't to sell off shares gradually
  Author: CHEN YAO,China Business Weekly staff

China might, over the next few years, sell off State-owned shares by piecemeal and at prices set by market forces, suggest stock market regulators.

That would end the government's "fire-sale plan," which has been weighted on share prices and has caused billions of yuan to be wiped out in the past two years.

"The government will likely choose companies with comparatively good corporate governance and profitability to conduct pilot programmes to sell its shareholdings," Li Qingyuan, head of the Planning Committee of the China Securities Regulatory Commission (CSRC), told the recent Eighth China Capital Market Forum.

"This is to guarantee share prices of these selected companies will go up rather than go down after the sell-off."

In 2001, the Chinese Government took the bold step of holding a "fire sale" to unload its shareholdings to finance government deficits and the construction of the nation's social security system.

Although the crude plan was abolished a month later, funds had been drained from the market, which triggered a two-year decline in share prices.

"The government will favour a gradual approach rather than the once-for-all solution which have proved to be unsuccessful," Li said.

"But no matter how the sell-off is adopted, China must do it as soon as possible. This year seems to be the best time," she added.

The benchmark Shanghai Composite Index has picked up strongly since November when it hit its historic 1,307-point low.

The current bull run in China's A-share markets will likely continue this year, as the macroeconomic situation is fostering strong growth in both domestic supply and demand, experts said.

"Rosy prospects in China's economy and the stock market's bullish mood will create a good external environment for the government to plan the sell-off," Li said.

The latest official forecast on China's economic growth for this year is 8 per cent, which will likely be the highest in the world.

China's banking system, once dubbed the weakest link of the economy, has been bolstered by the government's recent infusion of US$45 billion.

Also, the four largest State-owned banks plan to list domestically to strengthen their capital bases.

"If the government sees the bail-out of State-owned banks as its unwavering duty, it should apply the same principles to the country's stock market, whose natural born deficiencies were caused by the government," said Zhang Xin, head of CSRC's Company Listing Division.

"Stock market investors will have to be compensated if the government's sell-off causes share prices to drop sharply."

China's A-share market was created in the early 1990s in the wake of near-bankrupt State-owned enterprises' (SOEs) huge funding needs.

Some 60 million Chinese have, with limited investment channels, rushed into the stock market in anticipation of gaining extraordinary returns.

Share prices soared in the late 1990s, due to the dotcom boom and manipulation by market insiders.

The market has sunk in the past two years since a handful of companies were caught committing fraud, and since the government announced its massive sell-off plan.

Non-tradable shares, including State-owned shares, account for two-thirds of the shares issued by companies listed in China's A-share markets.

Selling State-owned shares in a lump sum would flood the market and cause the freefall of share prices, experts said.

"The selling price of State-owned shares should be determined by the market rather than the government," Li said.

Companies, once selected for the pilot programme, will be given more leeway to choose how they will sell State-owned shares under the government's guidelines, Li said.

The government should emphasize the importance of transparency when adopting plans to sell its holdings, said Cao Fengqi, head of Peking University's Finance and Securities Research Centre.

Any sell-off plans should be disclosed to the public before they are implemented, Cao said.

"The government is unlikely to choose a one-size-fits-all plan for all SOEs. Proposals may vary by sectors, or even geographic regions," he said.

(Business Weekly 01/20/2004 page4)

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