Signs of recovery doing little for stock markets

Despite A shares' poor performance, there has been a large number of initial public offerings and share issuances in the market. In fact, Chinese companies raised more capital from the equity market in 2010 than in 2007, when the market boomed.

While 2012 has proved to be a particularly difficult year to raise capital, the long list of IPOs awaiting approvals has nevertheless affected market sentiment.

In addition, according to Wind Information estimates, 8.5 trillion yuan ($1.3 trillion) worth of shares have been unlocked since the beginning of 2010 - from previous IPOs, new share issuances, selling by original majority shareholders and non-tradable share reforms. That amount, though, has tapered off this year.

The large potential pressure to sell may have placed a heavy weight on the market.

Perhaps reflecting the erosion of investor confidence, and partly as a result of the causes I've already mentioned, the A-share market has seen net fund outflows.

According to estimates from Wind Information, the A-share market has experienced net-fund withdrawals in every quarter since the first quarter of 2010.

Although the government has expanded the quota for, and accelerated the approval of, qualified foreign institutional investors, or QFII, since late 2011, that has proved to be too little and perhaps too late to change market sentiment.

While new approvals of QFIIs in 2012 reached $12 billion at the end of October, compared to $1.9 billion in 2011, total cumulative QFII approvals only amounted to $33.6 billion, which is tiny compared with the total tradable market cap of the A-share market, which has a total value of 15.5 trillion yuan.

In the coming quarters, we do expect corporate earnings to recover, as well as the economy, as de-stocking ends and output prices recover.

We also expect the authorities to continue to push for IPO reforms and improvement of disclosure and supervision, which should eventually help improve market confidence.

The participation of institutional investors, both domestic and international, should also increase over the medium term. Just know this - the performance of the domestic equity market is not so tightly correlated with the general economy.

The author is chief China economist with UBS AG.

 

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