Walter Hutchens’ Blog

I’ve been invited to be a guest on the news talk show Dialogue tonight to discuss recent events in China’s stock markets. It’s supposed to be a live broadcast, airing about 7:30 pm Beijing time (GST +8).

The mainland exchanges in Shanghai and Shenzhen had fabulous years in 2006.

The Shanghai composite index grew about 130%, exceeding 2,600 by year end, a dramatic recovery from the 1,000-ish level the index reached in 2005.

The (notional) total market cap of China’s mainland exchanges reached about a trillion US dollars, making them the world’s tenth largest stock markets, according to some accounts.

Daily trading volumes also ballooned as lots of new investors and capital entered the markets.

IPOs began again after a long moratorium.

The massive IPOs of Bank of China (USD 9.7 billion) and ICBC (USD 22 billion) both had large mainland A-share tranches to augment their “overseas” listings in Hong Kong (unlike say the earlier IPOs of China Life and China Mobile which were inaccessible to mainland investors).

Reform of the share classification system is essentially complete, eliminating (at least on a de jure basis) the difference between tradeable shares and illiquid shares (state owned or legal person shares, fei liutong gu, that formerly comprised most of the share capital of listed firms). This was accomplished by basically paying off the holders of listed shares, giving them about 3 shares for every 10 held to assuage any pain from price drops when more shares become tradeable (a practical solution, though dubious in terms of its fairness to the “whole people” for whose benefit those shares were ostensibly held, since “their” assets were transferred to investors whose consideration was simply their consent to the share reform process, when those investors had no explicit guarantees they wouldn’t be diluted).

The role of institutional investors also surged ahead, with 40% of the listed shares now held by institutions, according to PRC reports.

Lots of investors are obviously very happy about the market’s 2006 upturn.

Many had shares that had been under water throughout the 4.5 year bear market. Many have finally recovered the lost value and made positive returns. Indeed, anybody who got in at the trough and is now holding blue chips must be ecstatic.

Predictably, more folks are clamoring to get in. Recently there are reports of loans for apartments and cars being diverted into stock market accounts, and NPC vice chairman Cheng Siwei and others have warned of a bubble, triggering big adjustments this week.

The TV folks want to talk about all this, though they are probably more interested in it from the perspective of an investor rather than a policy and legal analyst. I don’t know who the other guest will be (they usually have two, one “foreign” and one Chinese).

Unlike the last time I was on, this time is supposed to be a live broadcast. I’ll have to hope I don’t sneeze.

Incidentally, some people avoid Chinese TV appearances because they don’t want to collude with or be seen as assenting to the Chinese government’s control of media. I can see the reasoning for such a stance (I certainly wish there was more press freedom in China), but I’m very comfortable being on Dialogue to talk about stock markets. Nothing I can imagine saying, no matter how radical compared to current practices, hasn’t already been forcefully argued in the Chinese financial and academic press already. Also, nothing I said last time was edited in any way that bothered me or seemed to dilute what I was saying (though I admit to being more “diplomatic” than was necessary—during a break the host actually encouraged me and the other guest to cross swords more, which might just happen tonight).