A strong rebound in China's stock market post-September 14 seems to have reignited investors hopes for a sustained bullish run of the bourses.

News of expected introduction of a slew of stimulating policies sounds exciting. However, as usual, its real effect on the market is more likely to be a short-term one, unless more fundamental changes in the market can take place to increase the transparency, liquidity and popularize the value-orientated investment ideology, said experts, China Daily reported Monday.

By the end of last week, the benchmark Shanghai composite index had rallied about 14 per cent since September 14, the start of a strong rebound after the authorities reiterated the pledge to implement reform plans in the capital market.

At a high-level meeting on September 13, the State Council urged the implementation of concrete reforms of the capital market, reaffirming the official declaration it made in February. This clarified the government's attitude on many key issues regarding the capital market and set a positive tone for future reforms.

For example, the February document encouraged product innovation and the opening of new fund-raising channels for brokerages. It also gave the protection of investor interest a high priority and called for the listing of more good-quality firms.

The issuing of the document had triggered a brief rally of the bourses at the time, but that soon fizzled to uncertainties as to the exact timetable for the execution of concrete reform plans.

Consequently, the stock market returned to the downward track that has dominated for more than three years. The benchmark index even fell below the psychological 1,300-point-level to reach a new five-year-low on September 9, further eroding investor confidence, until the latest round of rebound on the renewed reform pledge.

But after all the ups and downs, investors have become more rational. Whether the surge of the indices would continue and how long the trend would maintain in the near term are no longer the core issues. How to eradicate the root of problems in the bourses is more of a prime concern.

Huang Qinlai, a fund manager with Penghua Fund Management Co, said that the latest rebound had come too strongly and suddenly. It was largely supported by some speculative funds that had entered the bourses for profit-taking after September 13. And they are likely to withdraw afterwards.

It is hard to say whether the rally is a technical rebound after a sharp correction, or the start of an upturn, said Huang.

But it is better to be prudent, he added.

Generally speaking, the fund supply should become tighter in the fourth quarter. And the economic cooling measures adopted by the authorities are expected to further take effect then, so the results of the listed firms may be affected, he said.

Moreover, the expected resumption of initial public offerings and the remaining price gap between A shares and overseas stocks still exert some pressure on the market, so it is too early to make an optimistic prediction.

Huang's view is shared by many fund managers, who believe that idle funds outside the bourses were responsible for driving up the indices this time. They warn that market sentiment remains cautious since the performance of some blue-chip stocks is still unsatisfactory.

Yang Rui, deputy general manager of the research department of Boshi Fund Management Co, said that after the latest buying spree, investors would still use profitability to judge the value of stocks.

Macroeconomic controls would, however, gradually exert impact on the profitability of enterprises and some industries in the third and fourth quarters. And research by Boshi indicates that the annual profit growth of industrial enterprises in 2004 and 2005 are expected to slow moderately compared to the previous years.

The core issue of the A share market is on the market supply, or, the behavior and arrangement of the listed companies themselves, said Huang.

In that sense, the only way to gear fundamental changes in the market is to resolve the split share structure and give more incentives to the general shareholders.

To date, about two thirds of the shares in China's listed companies are still non-tradeable shares held by the State or State-controlled institutions. That has greatly affected liquidity in the market and put the holders of the minority tradeable shares at a disadvantage.

The authorities have repeatedly expressed their determination to solve the issue, though the exact scheme and timetable are not clear, partly due to the complexity of the matter and various relevant interest groups involved.

In the long run, the market trend still depends on the implementation of concrete reform measures by the authorities, such as the pilot scheme to resolve the illogical share structure, said Xu Lingfeng, a senior analyst with Guotai & Jun'an Securities Co.

Also proposed by the authorities and expected to be introduced are regulations to increase the liabilities of listed companies in fund raising, preferential dividend tax and stamp tax policies, as well as expanding financing channels for securities businesses.

Investors have great expectations for such capital market reforms, which are be reflected in the market correction earlier this year and the latest rebound that moved closely with the policy climate, he said.

They want to see some concrete moves to be really confident of the market.

In the near term, the China Securities Regulatory Commission is introducing new IPO policies which impose stricter requirements on listing applicants in relation to information disclosure, pricing, use of proceeds and their fundamentals and operational record.

The aim is to improve the quality of listed companies and force them to focus more on improving performance, instead of simply raising funds from the market.

Meanwhile, the banking authorities are planning to allow some commercial banks to launch fund management companies. The proposal, principally approved by the State Council, is still to be negotiated with the securities regulators. But it also enhances expectations of fresh funds coming into the market, as does the impending entry of more insurance funds to the bourses to trade equities directly.

As China's stock market becomes more international, with the rapid influx of qualified foreign institutional investors 21 to date and an approved investment quota of around US$2.7 billion thus far, foreign investors are also helping change the market structure and investment style of the country.

The value-orientated investment ideology, which focuses more on the value of an enterprise instead of the stock price fluctuation, has led more Chinese fund managers to include more under-priced and high-growth-potential companies in their portfolios.

Systematic reforms in the bourses, such as the experiment to reduce State holdings, are expected to trigger a revaluation of the value and pricing standard of the entire stock market in China, said Xu Lingfeng with Guotai & Jun'an Securities.

It will enable the A share market to gradually catch up with the standard in overseas markets, he said, but the process will certainly take some time.

Source: China Daily