Business

Editor: Bruce Meng
12 Sep 2008 09:52:22 GMT

SHANGHAI, Sept 12 – The longest-term investors in
Chinese stocks — controlling shareholders and some foreign
funds — have started to buy again, suggesting they see value
in a market that has plunged by two-thirds in the past 11
months.

The purchases do not necessarily mean the market has hit a
bottom. Panicking Chinese retail investors and mutual funds,
which together owned nearly 80 percent of tradable shares at
the end of last year, may continue dumping stocks for a while.

But the purchases do indicate the process of recovery may
have begun, and that some investors see the potential for fat
profits several years out.

“It’s clear that long-term investors have now begun to
build fresh positions, though their purchases have so far been
small, indicating it will take time before longs gain the upper
hand in the market,” said analyst Ren Chengde at Galaxy
Securities.

The Shanghai Composite Index <.SSEC> has plunged 66 percent
since last October in one of the biggest equity bear markets in
history. Nearly $3 trillion of value, equivalent to more than
70 percent of the country’s gross domestic product, has been
erased from the Shanghai and Shenzhen exchanges.

That has brought the average price/earnings ratio of listed
Chinese firms down to 17 times historic earnings from about 70
times less than a year ago. Forward PEs are now near the record
low of 16 times hit in 2005, and close to levels seen in some
major global stock markets.

Such valuations may still not seem cheap to shorter-term
investors; analysts think corporate profit growth could drop to
zero next year because of a global economic slowdown and a
cooling of China’s growth.

REASONABLE VALUATIONS

But long-term investors think the country’s economic boom
mean valuations may not stay so low for more than a year or
two.

“If you’re a long-term investor and plan to keep shares on
hand for two or three years, it now makes sense for you to
build positions gradually because of reasonable valuations,”
said Wu Haijun, Shanghai principal at Power Pacific Corp of
Canada, a foreign investor in Chinese securities.

“China’s economy will grow at least 8 percent in coming
years, a very high level by international standards, even
though it may slow” from 11.9 percent last year and 10.4
percent in the first half of this year, he added.

This prospect, in addition to encouragement from Chinese
regulators who want to support the stock market, has prompted a
series of big state shareholders to begin raising their stakes
in listed companies over the past several weeks.

New rules issued by the securities regulator late last
month allow a big shareholder to raise its stake in a firm by
as much as 2 percentage points over 12 months without first
seeking approval. Previously, a shareholder with over 30
percent needed to apply in advance for permission to raise its
stake.

Parents of some 10 listed firms, including Wuhan Iron and
Steel <600005.SS>, Hisense Electric <600060.SS>, Shanxi Coking
<600740.SS>, Ductile Pipes <000778.SZ> and Zhejiang Wanfeng
Auto Wheels <002085.SZ>, have since announced plans to buy
shares in the firms from the market, and some have started
buying.

The latest example is flag carrier Air China <601111.SS>,
which said on Friday its parent had obtained approval to boost
its stake by 2.86 percentage points to 54.52 percent. It did
not give a timetable for the share purchases.

“The stock market has really fallen too much and there is
now clear value in buying back our company’s shares,” said
spokesman Wu Yankun at Zhejiang Wanfeng. “And the government is
encouraging us to do that.”

There are also signs big state shareholders are slowing
sales of stocks made newly tradable by the expiry of lock-up
periods related to reform of shareholding structures and
initial public offers. Fears of such sales have been a major
factor undermining the market.

A total of 2.53 billion shares became tradable in July and
849 million were sold, data from the securities clearing house
shows. But although a massive 21.55 billion shares became
tradable in August, only 480 million were sold.

FOREIGN INVESTORS

Some foreign institutional investors, who buy stocks under
quotas in China’s Qualified Foreign Institutional Investor
scheme, also appear to be raising their holdings.

Recent, complete data on QFII investors’ activity is not
available, but the official China Securities Journal calculated
this week, citing clearing house data, that the market value of
QFII stock holdings jumped by $4.5 billion in August.

QFII investors do not have enough money to make much of an
impact on the market; their combined quota for money that they
can bring into China stands at slightly over $10 billion, or
about 0.6 percent of market capitalisation.

But they were among the first investors to start pulling
out of the market as it peaked late last year, so further signs
of their return could provide a much-needed boost to
confidence.

Analyst Chen Jinren at Huatai Securities said internal data
on the market compiled by his company and other brokerages
appeared to confirm that QFII investors turned net buyers of
stocks in August, focusing on large-capital blue chips.

“Naturally, few people can succeed in buying stocks at the
exact bottom of a market, so long-term investors start buying
near the bottom. That’s what is happening in China’s market
now.”
($1 = 6.84 Yuan)