The rally of Chinese shares is restoring confidence of investors. Experts attribute the rally to the reform of split shares and influx of capital into the market and forecast a bull.

Shares on the Shenzhen and Shanghai stock exchanges hit their highest level in nearly two years for the third day in a row yesterday as investors bought into companies that planned new share sales.

The benchmark Shanghai Composite Index ended up 0.95 percent at 1,545.687 points, its highest closing level since June 2, 2004 when it finished at 1,567.067 points.

Chinese stock market has been sluggish while its economy has been growing quite fast in recent years. One year after the share prices dropped below 1,500, the Shanghai composite index went down further to 998.23 on June 6, 2005.

He Qiang, director of the Securities and Futures Institute of the Central University of Finance and Economics, explained that the 1,500 points is both the psychological and the technical line for China's stock market. He believes that a bull is expected if the rally above 1,500 remains there.

On May 8, the regulations on securities issuance of listed companies released by the securities watchdog China Securities Regulation Commission were effective. That means the resumption of the fund-raising of listed companies one year after its suspension.

Capacity expansion normally is met with resistance on the Chinese stock market. However, this time the policy which had been thought to be a damper turned out to be a booster to the market. The rise of shares on the news of the loan interest rates hike and relaxation of QDII (qualified domestic institutional investors) also seems to have convinced experts that the split shares reform has brought fundamental changes to the Chinese stock market.

Since the reform was launched on April 29 last year, the Chinese stock market has been experiencing profound changes which were either drastic or quiet. The reform helps stabilize the market and lay solid foundation for mechanism construction.

By April 24, 2006, 868 companies listed in Shanghai or Shenzhen had completed or started the reform, accounting for 65 percent of the total that should conduct the reform. Their capital and shares made up 70 percent and 67 percent respectively of that of the companies which are supposed to be involved in the reform.

So far all kinds of listed companies holding B shares, H shares or ADR (American depository receipts), have started the reform.

A report by the Everbright Securities Research Institute says non-market factors affecting A shares evaluation are fading away when the problem of split shares is resolved.

Analysts think the reform has fixed the systematic loopholes regarding the development of the market. In addition, the stable and fast growth of the national economy, the neighboring bull market, as well as the sufficient new capital inflow, all pave the way for A share market to a boom.

QFII (qualified foreign institutional investors) has got nearly 6 billion US dollars of quotas and CSRC plans to expand the quota to 10 billion US dollars.

Frank Gong, chief economist for Greater China area of JP Morgan said recently that he had met some 200 foreign institutional investors over a week and nearly every one of them asked him how to enter the Chinese A share market.

He explained that over the past two years international investment institutions were concerned about the possibility of a dramatic economic slowdown in China because of the up-surging fixed asset investment and overcapacity in some sectors. But the data adjustment based on the national economic census at the end of 2005 led to restoration of confidence on China's stock market.

Figures from China Securities Depository and Clearing Corporation show that by March 31 this year there had been 73.82 million registered accounts for individual and institutional investors for A share, B share and funds. That was 210,000 accounts more than the previous month.

"The capital influx demonstrates the market confidence on one hand and will serve as an important driving force on the other to push the share prices up," noted He Qiang.

By People's Daily Online

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