China teeters between quick profit and survival

CHINA'S fledgling domestic stock markets, which last week staged a spectacular recovery after months of decline, are now teetering between the temptations of profit-taking and the government's new- found determination that the bourses should prove viable.

With daily turnover surging to record levels, the Shanghai A- share index more than doubled in the past week, while the Shenzhen market was up by 67 per cent. A- shares are traded by Chinese, while foreigners are only permitted to buy B-shares.

The frenzied trading followed the China Securities Regulatory Commission's announcement the previous weekend of a rescue package aimed at rekindling investor interest. All new listings and stock issues have been suspended for the rest of the year, and the government said it would create new channels for capital inflow, including providing securities firms with credit. It also suggested limited access for foreigners to the A-share market.

China's stock markets have had a chequered history. After they opened in 1990, mainland investors scrambled to buy A-shares, prices soared, and two years ago there were serious riots in Shenzhen by punters angry about corruption in a ballot to decide who could subscribe for issues.

But A-shares have nosedived in the past 18 months. Last week's 349-point rise in Shanghai to 683, and Shenzhen's two-thirds gain still left the bourses well down on the beginning of the year. B-shares were also poor performers, as foreigners became increasingly disillusioned by poor Chinese accounting practices, bad company results, lack of regulations, and the quoted firms' tendency to ignore their stated business plans.

Last week's heavy trading in A- shares may still have had more to do with government policy than the small Chinese investor's renewed enthusiasm for share-trading. The China Daily said the main force in the market was still 'the institutional and large investors who have poured a large amount of capital from unidentified sources into the market'.

Daily turnover reached a record Y10.5bn (USdollars 1.22bn) on Thursday, and the week's total transaction values were 10 times the previous week's.

The government's determination to rescue the stock markets and encourage private investment coincides with the completion last week of the sale of more than Y100bn of state bonds. The sale was crucial to limit the projected budget deficit this year.