VZCZCXRO1756
RR RUEHCN RUEHGH
DE RUEHGH #0165/01 1210954
ZNR UUUUU ZZH
R 300954Z APR 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6841
INFO RUEHBJ/AMEMBASSY BEIJING 1849
RUEHGZ/AMCONSUL GUANGZHOU 1189
RUEHCN/AMCONSUL CHENGDU 1218
RUEHSH/AMCONSUL SHENYANG 1216
RUEHHK/AMCONSUL HONG KONG 1349
RUEHIN/AIT TAIPEI 1028
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7391
UNCLAS SECTION 01 OF 02 SHANGHAI 000165
SIPDIS
SENSITIVE
SIPDIS
TREASURY FOR OASIA - DOHNER/CUSHMAN/WINSHIP
TREASURY FOR AMBASSADOR HOLMER, DAN WRIGHT
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN FRANCISCO FRB FOR CURRAN; NEW YORK FRB FOR
CLARK/CRYSTAL/DAWSON
STATE PASS CEA FOR BLOCK
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ
USDOC FOR ITA/MAC DAS KASOFF, MELCHER, MCQUEEN
E.O. 12958: N/A
TAGS: EFIN ECON PGOV SOCI CH
SUBJECT: AUTHORITIES IMPLEMENT MEASURES IN ATTEMPT TO BOOST CHINA'S
STOCK MARKET
REF: A) Shanghai 28; B) 07 Shanghai 325; C) Shanghai 97
1. (SBU) Summary: TDY Econ Officer solicited views on China's
equity markets, particularly in light of recent measures to
boost market performance, which highlight authorities' continued
efforts to manage the domestic equity markets. Two measures
were implemented during the week of April 21, a reduction in the
stamp tax on share trading and guidance on sales of non-tradable
shares, which has pushed the Shanghai Composite Index (SCI) up
19% through the close of trading on April 30. These and other
measures suggest authorities are increasingly concerned about
the fall in the A-share market, which saw the Shanghai Composite
Index decline 50% from its October 2007 peak (ref A). Questions
remain about the authorities' ability to "manage the market"
over the medium term, especially given negative retail investor
sentiment and slowing corporate profit growth. End summary.
--------------------------
Have Authorities Drawn a Line in the Sand?
--------------------------
2. (SBU) In a widely anticipated move, Chinese authorities
announced a reduction in the stamp tax from 0.3% to 0.1% after
the market close on April 23 effective the following day. The
announcement followed guidance issued on April 20 by the China
Securities Regulatory Commission (CSRC), designed to alleviate
concerns over a potential share supply overhang related to
non-tradable shares (NTS), which are able to convert to tradable
status beginning this year. The timing of the two measures
suggests that policymakers are increasingly concerned about
market stability, and may view both the 50% decline and the SCI
3,000 level as important thresholds.
3. (SBU) The decrease in the stamp duty is a reversal of last
May's increase (ref B), enacted to stem what authorities viewed
at the time as an already overheating market (the SCI quadrupled
from May 2005 to May 2007). In the past, authorities have used
policy and moral suasion to guide the market, but were generally
content to let the market run-up continue leading up to last
fall's National Party Congress. In the wake of the Party
Congress, authorities attempted to manage the market down
through window guidance and other measures. However, concerns
have grown in recent months that the adjustment process has
gotten away from them. Thus far in 2008, authorities have taken
several steps to support the market, including approval of new
domestic investment funds (in the past a successful way to boost
the market), expanded quotas for foreign portfolio investment
(QFII), suspension of corporate income taxes on mutual fund
income and tighter regulation of new share issuance. Despite
these measures, the market was down 41% year-to-date prior to
the implementation of the most recent measures.
4. (SBU) Press reports and market speculation suggest that
authorities may introduce additional measures soon. Most
reports focus on the possibility of the launch of margin trading
and the long-delayed stock market index futures (ref C) over the
May Day holiday. Despite almost two years of mock trading and
the issuance of futures licenses to brokers, final approval of
index futures by the State Council has remained on hold given
government concerns over short-selling in an already fragile
market.
5. (SBU) Notably, these measures represent the first significant
moves made by authorities since Wang Qishan was elevated to Vice
Premier in charge of the financial portfolio at the National
People's Congress in March. Vice Premier Wang's reputation for
tough decision-making, including his refusal to support the
troubled Guangdong International Trust and Investment
Corporation (GITIC) as Vice Governor of Guangdong Province in
1998, had generated debate in the press over his willingness to
"rescue the market." However, Shanghai-based financial sector
analysts suggest that these recent measures may reinforce a
perception among investors that the government will intervene to
support the market, particularly in advance of the Olympics in
August and despite limited reported incidents of social unrest
related to the market sell-off.
SHANGHAI 00000165 002 OF 002
6. (SBU) In terms of the share supply overhang, the investment
bank UBS estimates that up to RMB 1.5 trillion ($220 billion) in
NTS will "unlock" (convert to tradable status) in 2008. Almost
half the total conversion is set to occur in August (RMB 400
billion, $57 billion) and December (RMB 300 billion, $43
billion). The amount scheduled to "unlock" next year is even
larger, with over RMB 600 billion ($86 billion) set to convert
in September 2009 alone. The new NTS guidance states that
holders of "unlocked" NTS seeking to sell 1% or more of a
company's total shares within a one-month period must do so via
privately negotiated block sales. In addition, controlling
shareholders cannot transfer or sell unlocked NTS in the 30 days
prior to the company's semi-annual or annual financial results.
With these measures, authorities aim to reduce share price
volatility, so that large block sales and sales by insiders
during earnings reporting season will not impact open market
trading. Although the size of the share overhang has clearly
weighed negatively on market sentiment, one investment advisor
in Shanghai argued that much of this fear is overblown since
A-share listed companies' parent groups still control the
majority of unlocked NTS and are reluctant to sell given that
parent groups 1) do not have an immediate need to raise cash and
2) currently view their companies' share prices as undervalued.
--------------------------
Concerns Remain in the Market
--------------------------
7. (SBU) While the market jumped 9% on April 24, the largest
one-day gain in over six years, following the cut in the stamp
tax and is up 19% since April 18, it remains to be seen whether
the authorities will succeed in halting the broader secular
decline seen since October given slower retail investor demand
and the prospects for slowing corporate earnings. Some market
participants are skeptical. One Shanghai-based fund manager
noted that all of the 36 new mutual funds approved by the CSRC
since February have been small and retail investor interest has
been tepid. Concerns are also growing around firms' ability to
maintain profit growth, especially in an environment marked by
tighter policy measures and rising input costs.
8. (SBU) This has led some analysts to highlight that valuations
of A-share-listed companies remain rich at roughly 28 times
earnings compared with H-shares (19 times). Among cross-listed
companies, the average premium for A-shares relative to H-Shares
stands at just under 40%, down from almost 50% in late March but
still underscoring the relative valuation gap. However,
A-shares for some large financial firms (Bank of Communications,
Ping An Insurance, China Life Insurance) now trade at or below
par with their cross-listed H-shares. As of the market close on
April 30, H-shares have fallen 30% year-to-date compared to a
12% decline in the A-share index.
9. (SBU) Comment: If the market resumes its sell-off, Chinese
willingness to promote domestic capital market reform could be
adversely impacted. On the other hand, continued government
intervention to support the market creates moral hazard and
reinforces the view that the stock market remains a "policy
market."
JARRETT