[Paleopsych] NYT: China Is Said to Consider $15 Billion Bailout of Stock Market

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Mon Jun 20 00:32:13 UTC 2005

China Is Said to Consider $15 Billion Bailout of Stock Market

[This is a quite significant article, at least to me, since I did not know that 
only state-run enterprises in Red China could sell stocks. All this so-called 
privatization is not really taking place. It's as though I could buy stock only 
in the United States Postal "Service"!

[Also, although I knew it already, Red China is practicing Keynesian 
macro-economic management.

[I shall not make the case for genuine free enterprise here, merely predict 
that Red China is not going to do nearly as well economically as most people 


    SHANGHAI, June 14 - The Chinese government is considering creating a
    $15 billion fund to help bail out the nation's ailing stock market,
    according to a senior government official and people told of the

    The creation of a huge fund to invest in mainland stocks would be the
    government's most striking effort yet to prop up share prices and try
    to restore confidence in a market that has fallen to its lowest level
    in about eight years.

    The proposal comes at a time when China's economy is sizzling hot, but
    the nation's Communist Party leadership is struggling to fix a stock
    market that has been broken for several years.

    The Shanghai and Shenzhen stock exchanges, where about 1,400
    state-owned companies are listed, are each down 40 to 50 percent from
    the highs they reached in 2001. In recent months, struggling brokerage
    houses and large investors have been aggressively lobbying for a
    government bailout fund.

    Government bailouts have a weak track record, however, and the
    proposed support is unlikely to nurse the growth of the capital
    markets here. When authorities in Hong Kong and Tokyo stepped in to
    aid their local stock markets, the moves only provided a short
    psychological lift and failed to produce a sustained turnaround.

    Analysts say the government is considering the huge bailout proposal
    because the market has fallen so sharply in the last year that some
    government officials fear a bigger drop could seriously impede the
    long term development of China's financial markets.

    Indeed, China's weak system for raising money and putting it to
    profitable use is not just hurting investors and state-owned
    companies, experts say. At the heart of the problem is that private
    companies, which have a much better track record, are not allowed to
    list on the Chinese stock exchanges.

    "China needs a healthy capital market," said Zhou Chunsheng, a
    professor of finance at Guanghua School of Management at Beijing
    University. "Traditionally state-owned companies found it easy to get
    financing from state-owned banks. But now we have more small
    businesses and private businesses. And they have to find ways to get

    Some Chinese officials say they are motivated in part from fears that
    huge and mounting investor losses could also create social discontent
    among the millions of people who began buying shares in the early to
    mid-1990's, when stock prices were climbing.

    While it is not clear whether China's leadership will ultimately
    approve the bailout proposal, expectations that the government is
    about to act helped lift share prices last week in one of the biggest
    one-day rallies in three years.

    If the $15 billion investment fund were created, the size of the fund
    would represent about one-tenth of the current value of the stock
    market's floating, tradeable shares. But some analysts say that
    turning to a bailout fund could make the situation worse by
    encouraging investors to sell more of their stocks, saddling the
    government with huge additional losses.

    "If the government really wants to do something they should try some
    other measures instead of simply pouring more capital into the
    market," said Qian Qimin, a senior analyst at Shenyin & Wanguo, a
    brokerage house based in Shanghai.

    The government has turned increasingly aggressive in its efforts to
    restore investor faith in the market. Nearly every week, regulators
    announce a new initiative aimed at shoring up the slumping market.

    On Monday, for instance, the government said that it would offer loans
    to two major brokerage houses. Regulators have also said they plan to
    reduce taxes on stock sales and give listed companies the right to
    engage in stock buybacks.

    The government has also reduced transaction costs and allowed
    insurance companies and the government pension fund to invest.

    Even more, foreign investors who need special approval to buy shares
    inside China have been given greater access to the domestic stock

    Regulators have also introduced new corporate governance rules,
    cracked down on accounting fraud and closed some corrupt and insolvent
    brokerage houses.

    Despite such efforts, stock prices have continued to slide.

    Last week, the Shanghai exchange index dipped below 1,000 points for
    the first time since 1997, crossing what many investors considered a
    crucial technical and psychological trading level.

    Then, last Wednesday, the stock exchange suddenly jumped 8.2 percent
    on rumors that the government might bail out state-owned brokerage
    houses or create the bailout fund big investors have been advocating
    in recent months.

    Trading has been flat to down slightly since then.

    "It's very hard to estimate the future of the stock market because the
    market is often interfered with by the government," said Mr. Qian at
    Shenyin & Wanguo Securities. "How often the government will take
    administrative measures and how effective these measures are will
    decide whether the stock index will rise or fall in the future."

    China opened its two stock exchanges in 1990 and 1991 as a way to help
    state-owned companies raise money and to create a foundation for a
    thriving capital market system.

    For several years, prices rose steadily as millions of investors bid
    up the shares of state-owned enterprises, raising billions of dollars
    for those companies and helping alleviate pressure on the already
    struggling state-owned banking sector.

    But since late 2001, the stock market has been tumbling amid
    allegations of accounting fraud, poor corporate governance and
    continued government interference in business operations. On top of
    that are fears that regulators might allow some of the state's huge
    holdings in legal, nontradeable shares (which represent more than
    two-thirds of the market's value) to be released into the market,
    further depressing prices.

    The market has also soured on initial public offerings. In 2002, the
    Shanghai Stock Exchange raised about $6 billion through such
    offerings, slightly more than the longer-established Hong Kong Stock

    But in the two years since then, Hong Kong has raised close to $20
    billion through initial public offerings compared with just $9 billion
    in Shanghai. And this year is expected to be no different, with all
    the big Chinese companies deciding to raise the bulk of their money in
    Hong Kong, not Shanghai.

    Few are optimistic about the stock markets' prospects over the next

    "In my view the stock market is still overvalued, even after falling
    50 percent," said Joe Zhang, an analyst at UBS. "We were paying way
    too much for stocks back then. And we are now beginning to realize
    that what we bought was not BMW, it was Xiali Automobile."

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