China Allows Foreigners to Trade Its Stock : * Securities: The Shanghai exchange is the setting for the first such action since investors were thrown out in 1949.
The Shanghai stock market opened its doors a crack to foreign investors Friday for the first time since 1949, when China banished what it called the hated capitalist speculators.
Share prices in the one company sold to outsiders surged from an opening bid equal to $72 per share to $92.20 by late morning before closing at $88.50.
The B shares in Shanghai Vacuum Electron Device Co.--a state-owned television company--are denominated in Chinese yuan but are paid for in foreign currency at the official exchange rate.
China made its first sales of stock to foreigners since the 1949 communist revolution when a syndicate of Hong Kong and Chinese underwriters handled the overseas sale in December of $74 million worth of B shares in Shanghai Vacuum.
Friday was the start of the same activity on the Shanghai market, the biggest in Asia before being shut down in 1950. The Shanghai stock market reopened in 1986 as part of market-oriented economic reforms promoted by senior leader Deng Xiaoping. Formally reorganized as the Shanghai Securities Exchange in December, 1990, it handles stock in nine companies.
Allowing foreigners to trade special shares inside China on this market is a step forward for economic reform, but still falls far short of open access by outsiders to this country’s budding stock exchanges. Analysts say Shanghai may issue B shares for foreign investors in two or three additional companies later this year.
The Shanghai exchange is located in an ornate, marble-pillared room in a building on the city’s famous Bund, a river-front street of colonial-style buildings left over from an era when foreigners controlled much of the city.
Most investors in Friday’s trading of Shanghai Vacuum shares were from Hong Kong, the United States or Japan. A total of 3,040 shares was sold, according to reports out of Hong Kong.
Trading is done through Chinese and Hong Kong brokerage houses, which buy and sell orders, then relay instructions to traders on the floor.
China’s other major stock exchange, in the special economic zone of Shenzhen--just across the border from Hong Kong--will start selling special B shares to foreigners next week. The first issue is in China Southern Glass Co.
Plans are under way in Shenzhen for issuing B shares in a total of 10 companies. The Shenzhen market now handles six stocks for Chinese investors.
Total capitalization on the Shanghai market is about 3.4 billion yuan, or $625 million dollars. The Shenzhen market’s capitalization is about 8.3 billion yuan, or $1.5 billion.
Shanghai Vacuum, one of the more successful state-run enterprises in Shanghai, has said that money raised from stock sales to foreigners will be used to import equipment for producing color-television tubes.
Regular A shares have become popular among Chinese investors in Shanghai and Shenzhen, where most stock players believe that government policies and regulations will ensure fairly steady upward movement of the market. Stock buying has become so popular that authorities have on some occasions used lotteries to determine who is allowed to buy new issues.
Some analysts in Hong Kong are similarly optimistic about B shares, arguing that the Chinese government, determined to make a success of its cautious steps in stock market experimentation, will allow issuance of shares only in solid companies with good earnings potential.
Other investment analysts are cautious because of political risks, the possibility of government intervention and lack of clear laws about how the exchanges are to operate. Risk factors also include a strong potential for insider trading and the failure of Chinese accounting practices to meet international standards.
The strong Chinese interest in stocks has driven many price-earnings ratios (the price of a stock divided by its per-share earnings for a 12-month period) far higher than they would be in Western markets. It is not clear how this may affect B shares.
