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Market Watch NO. 35, 2015
 NO. 35 AUGUST 27, 2015

OPINION 

SOE Reform Invigorates Capital Market 

When looking at industrial development trends in 2015, I mentioned that reform of state-owned enterprises (SOEs) would be a highlight of the stock market, one deserving the attention of investors. This prediction was only half right.

State-owned railway transportation equipment makers CSR Corp. and CNR Corp. combined in May to form CRRC Corp., establishing a model for SOE reform.

The soaring stock prices of the two companies before the merger also brought considerable gains to investors confident in SOE reform.

However, I didn't expect the stock price of the newly established CRRC to be so high, valuing the new company at nearly 1 trillion yuan ($156.25 billion).

The aim of the merger between CSR Corp. and CNR Corp. was not to stimulate the stock market but to seek business opportunities from the Belt and Road Initiative and free trade zones.

The sudden and irrational rise in the market value of the new company left little room for a further increase. Soon after, its stock price collapsed along with the rest of China's A-share market.

When the A-share market halted its decline and resumed slight growth, CRRC's stock price nonetheless remained low. Investors' enthusiasm has been replaced by depression, intensifying the stagnation of CRRC's stock price.

Recently, listed subsidiaries of China Ocean Shipping (Group) Co. and China Shipping (Group) Co. have suspended transactions of their stocks, fuelling market expectations that the two groups may merge. These expectations have in turn pushed up stock prices of other SOEs with the potential for reorganization.

Although some investors still possess lingering fears about trading in SOE stocks after the dramatic fall in the price of CRRC stocks, most other investors think they have learned the lessons of the CRRC case and will not lose money.

In the short run, SOE reform may cause stock investors to have their hearts in their mouths, but it must continue as far as the government is concerned.

China's leadership places great faith in SOE reform. President Xi Jinping once said, "China's reform has entered a critical stage and a 'deep-water' zone, and we must lose no time in deepening reforms in key areas with greater political courage and wisdom."

As the craziness of the A-share market subsides, investors have adopted a more cautious approach than they did when investing in CRRC stocks.

The lesson of CRRC's stock price plunge has been learned and stock prices of SOEs are unlikely be overvalued unless the whole market becomes gripped by another irrational frenzy that sends prices soaring.

Although China's stock market has yet to become a real-time barometer of the macro-economy, the lackluster state of the economy is likely to have an adverse impact on the stock market in the second half of 2015.

Moreover, massive SOE reform may affect the business operations of some enterprises, disrupting their development in the short term.

While this disruption may not be detrimental to large listed companies, market confidence could be impaired. Some irresponsible so-called experts may claim that poor business performance after SOE reform indicates its failure, causing stock prices to decrease further.

The reform is not merely about enterprises merging but enhancing the strength of SOEs to enable them to play their full role in a market economy.

How long the process will take depends on the joint efforts of the supervising authority, corporate management and employees, as well as the public.

The capital market has its own operating rules. The expectations of SOE reform appeal to investors. They will decide whether they will make long-term investment based on their confidence in SOE reform or alternatively, just try to make a quick buck.

Market value and price-to-earnings ratio are two important indicators of whether the market is rational. Investors should be cautiously optimistic.

This is an edited excerpt of an article written by economist Song Qinghui and published in Securities Times 

NUMBERS 

1,786 

Number of project contracts that Chinese companies signed throughout countries along the Silk Road Economic Belt and 21st Century Maritime Silk Road in the first seven months of the year, amounting to approximately half the value of total overseas contracts

4.8% 

Decrease of energy consumption per unit of GDP in 2014, the largest in the past five years

410 mln tons 

China's crude steel output in the first half of 2015, dipping 1.3 percent year on year, the first drop in nearly 20 years

503.4 bln kwh 

China's electricity consumption in July, a fall of 1.3 percent year on year

278.89 mln tons 

China's rail freight volume in July, plunging 10.9 percent year on year

15 

Number of Airbus jets that China Eastern, the country's No.2 airline by market value, plans to acquire at a cost of about $3.6 billion in order to meet the booming demand for air travel

$42.6 bln 

Estimated personal fortune of Chinese property tycoon Wang Jianlin, who overtook Hong Kong's Li Kashing as the richest man in China on the Hurun Global Chinese Rich List 2015

0.77% 

Profit growth of China Vanke, the country's largest property developer by revenue, in the first half of the year, a sharp decline from the 5.55-percent increase in the first half of 2014 and the 22-percent increase in the first half of 2013

Copyedited by Calvin Palmer 

Comments to yushujun@bjreview.com

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