The first nontradable share reform experiment of four companies on Chinese mainland's A share market was viewed as a major milestone and turning point of the market by some international investment banks.

"This is an important step forward of A share market, though itis just the very beginning," Nicole Yuen, head of China equities for UBS, told Xinhua in a recent interview.

"I got calls from our customers asking how to invest more in the A share everyday" since CSRC (China Securities Regulatory Commission) initiated the reform of floating non-tradable shares and the trial companies' plan followed, she said.

Earlier this month, four domestically listed companies, the first group with an approval from the CSRC and the stock market watchdog in mainland, announced their pilot share-merge plans by distributing their former non-tradable shares among their existing shareholders following a guideline by CSRC earlier.

"We think the CSRC program is long-term positive for the A share market by removing legal barriers to allow listed companies to be owned eventually by individuals and institutions that are entirely profit-oriented, " said Jerry Lou, Hong Kong-based China Strategist of Morgan Stanley.

He added that this fundamental change in corporate ownership should directly lead to an improvement in corporate governance and strengthening of minority shareholders' rights and allowing more incentive schemes for management.

Lou described the non-tradable problem like the sword of Damocles, which has been overhang capping the market upside for many years.

Retail investors in mainland used to worry about a dramatic increase in tradable shares, which could dry up liquidity and bring about a market collapse.

However, such outcome seems to be ruled out by the CSRC's latest directive, said Lou.

"For any stock market, it is the fundamentals of companies, rather than pure of supply/demand, that dominates market performance in the long run," said Vincent Chan, Hong Kong-based CSFB (Credit Suisse First Boston)'s analyst, in his research report.

He reminded the experience of listing the huge mainland oil stocks in Hong Kong market. Before these stocks came to the marketin 2000-2001, investors worried about the negative impact they posed on the smaller chemical stocks.

However, after their listing,all these companies enjoyed a bull market that lasted until recently.

Commenting on the compensation proposals made by the trial companies, he said after the compensation, the average holding cost, in the form of the 2004 P/E (price/earning) ratio, have beenreduced by 23 percent to 27 percent.

"After this reform, the P/E of the A share market will be lowerand become much closer to the mainland stock listed overseas," hesaid.

According to him, with oil and telecom excluded, the current 2004 P/E for A shares and other mainland stocks are 21.5 and 17.2 respectively, and if the A share market got a 25 percent compensation, the effective P/E would drop to 16.1, cheaper than mainland stocks listed overseas.

However, a survey made by Sina.com shows that retail investors,unlike these international investors, did not respond positively to the policy change with only 13 percent believing that it was a very bullish start to A share reform.

Lou said the reason behind the survey result was a long time unpleasant memories of nontradables fully floating issue.

"The A share market is very likely to be volatile, but we see limited downside given that we are bullish on the major policy change from a long-term perspective," Lou reiterated.

Source: Xinhua