Return of the Red Chips
Liu Yunyun

September saw a wave of Hong Kong-listed Chinese companies returning to the mainland stock market, helping the Shanghai Stock Exchange surpass Hong Kong to become the sixth largest stock exchange in the world.
From September 10 to 25, the China Securities Regulatory Commission, the securities watchdog, approved the initial public offering (IPO) applications of four large H-share companies, namely China Oilfield Services Ltd.; China Construction Bank Corp., the most profitable state-owned bank on the mainland; China Shenhua Energy Co. Ltd., the largest coal mining company; and PetroChina Co. Ltd., the most profitable company in Asia. This wave of IPOs indicates that the mainland securities market is large and broad enough to handle consecutive IPOs of large companies. The return of the red chips also helps wipe out the image of the mainland market as incapable and incompetent.
Paving the way
In early June this year, the Chinese Securities Regulatory Commission issued a trial regulation guiding IPOs launched by overseas listed Chinese companies, which ushered in the era of the return of red chips. According to the regulation, the red chips reaching the following standards can apply for IPOs on the mainland: they must have been traded in Hong Kong for over a year; have a total market value of no less than HK$20 billion ($1=HK$7.7566); have an aggregate net profit of the last three financial years no less than HK$2 billion; have 50 percent of the profit or 50 percent of the operational assets coming from the mainland.
The concept of red chips can be traced back to the early 1990s in the Hong Kong stock market when investors referred to the stocks of Chinese companies registered overseas and listed in Hong Kong as “red chips.” These can be divided into two categories: old red chips listed before 1997, including small companies such as Beijing Enterprise Holdings Ltd., Shanghai Industrial Development Co. Ltd., China Travel Service; and new red chips listed after 1997, chiefly large state-owned enterprises approved by the State Council, such as China National Offshore Oil Corp., China Mobile, and China Telecom. Of the 100 H shares on the Hong Kong main board, 50 (including PetroChina) have already returned to the mainland stock market.
With the return of red chips, the current mainland market value already outpaces that of Hong Kong. At the end of 2005, the total market value on the mainland was only 3.24 trillion yuan ($1=7.5143 yuan), about 40 percent that of Hong Kong. At the final bell of 2006, the mainland market grew to 8.94 trillion yuan, equal to 67 percent that of Hong Kong. However, the mainland figure had surged to 25.31 trillion yuan by the end of September this year, outpacing Hong Kong’s HK$20 trillion.
Most of the H-share companies are large and well performing. Judging from the profitability, total profit achieved by the Hong Kong listed PetroChina and China Mobile in 2006 was equivalent to half of the total aggregate profit of the over 1,000 A-share market listed companies. The quality of the listed companies is crucial to the competitiveness and attractiveness of a capital market.
Individual investors are having mixed emotions about the large IPOs by the returning red chips. For instance, the Shenhua Energy IPO froze 2.6 trillion yuan on September 26, leading to a 1.6-percent plunge of the Shanghai Composite Index. Zhao Xiaoman, a Shanghai stock trader, lost one fifth of her assets on that day. But on October 9 when Shenghua shares were traded and the frozen capital was set free, Zhao quickly recovered her loss.
“It’s good that the large companies are returning,” said Zhao. “But the frequent freeze and unfreeze of capital in the market really disturbed me.” The benefit of the red chips return is obvious, according to Liu Hongru, Chairman of China Capital Market Research Society and former chairman of CSRC. First of all, the prodigal red chips will attract more institutional funds to the stock market, which will help rectify the market order. One of the major tasks of the Chinese Government is to encourage more institutional investors to participate in the stock market. Currently, mutual funds account for 40 percent of the tradable market value. “But it is still not enough,” Liu contended.
Investors can share the dividends from those profitable companies. For instance, China Mobile was known as one of the “most generous companies” in Hong Kong. Its shareholders got HK$1.54 per share from the company’s 2006 profit. As a mainland company, most of the revenues of China Mobile have come from its mainland operation. If it can be successfully listed in the mainland stock market, mainland investors will be able to share the profits of their homegrown company.
The listing of red chips on the mainland will influence the mainland stock indexes and readjust the mainland constituent stock structure. But in the short term, the market will be challenged by the capital shortage if large companies come back one after another, coupled by the government’s strengthening measures. Double-edged liquidity In spite of the condemnation of excessive liquidity and influx of international speculative money, experts believe the abundant liquidity on the mainland actually provided a rare opportunity for the return of the H shares. In order to return, they needed huge sums of capital for their debut in the stock market which in turn helped squeeze out the liquidity.
Meanwhile, the listed companies can raise more money from the mainland A-share market, because their shares on the mainland market are pricier than their shares in Hong Kong. “This is one of the most important reasons for their coming back,” said Liu. Maturing stock market supervision and a more rational manner of stock trading has also encouraged the red chips to come back home. Actively promoted by the mainland authorities, most of the H-share companies like Ping An of China, China Life and China Unicom have returned to the mainland.
The IPO of Construction Bank of China raised 58 billion yuan. The respective 50-billion-share IPOs of PetroChina and Shenhua Power will tap into the great potential of mainland investors. According to PetroChina’s IPO application, it will issue 4 billion shares. If the IPO price were set at its H share price of HK$14.28, PetroChina would raise about 55 billion yuan in the mainland.
Maturing markets
Since shareholding reform in the mainland was completed in May 2006, investor confidence has been encouraged and helped contribute to the most bullish stock market ever. At the end of this September, the benchmark Shanghai Composite Index surged to 5552.3 points, doubling the final 2006 figure. The Chinese stock market had been associated with policy, and most people referred to the mainland stock market as a “policy-directed market.” The government was severely criticized by the public after the Ministry of Treasure tripled the stock stamp tax from 0.1 percent to 0.3 percent on the night of May 30, causing three days of consecutive stock price plunges and a sluggish June and July market. The harsh public criticism forced the government to turn to other solutions.
On September 20, the price/earning ratios of companies listed on the Shanghai and Shenzhen stock markets reached 62 and 70, indicating that the mainland market was the most expensive in the world. Again, the alarm bells rang around the government hallways.
“The 17th Congress of the Communist Party of China was going to be held very soon, and the authorities wanted the market to remain stable,” said Huang Zefeng, strategy analyst with Haitong Securities. “There are three ways to cool the market: strengthening supervision to avoid manipulative trading, raising the interest rate and the reserve requirement rate, and expanding stock supplies.”
The first two options did not seem to produce effective results. The authorities have continuously warned of illegal stock trading and punished those involved in stock market manipulation. At the same time, the central bank has raised the interest rate and reserve requirement rate five and seven times respectively so far this year, each rise followed by stronger stock price surge. A source from the CSRC admitted to China Securities News that in order to resolve the liquidity problem, the key is to adjust the supply, not just the demand. The measures directed at killing investors’ demand could not solve the problem, while providing good quality company shares is an effective way to achieve the sustainable development of the capital market.
The change of management methodology was thought-provoking for many. Sun Bolei, a securities analyst, contended that the authorities had reached a consensus that the best way was to launch more IPOs to cope with the excessive liquidity. This September alone, the authorities quickened the speed of IPOs. Altogether 13 new shares began to trade in the A-share market, raising nearly 150 billion yuan.
The fastest return came from the Construction Bank of China. It applied for listing on August 27, started its roadshow on September 11, and began to trade on September 25, just less than a month after application. “This demonstrated the authorities’ way of monitoring the stock market has changed,” said Zheng Xiaofeng with Yingda Securities Co. Ltd. Faced with the huge capital, the only thing to do now is to carry out IPOs of big companies to absorb the liquidity, according to Zheng. Currently, the number of good quality and big domestic companies not listed has shrunk, and the overall listing mode of listed companies may trigger stock trade manipulation. Therefore, the burden lies on the well-performed overseas listed Chinese companies.
Pan Feng, analyst with the research center of Galaxy Securities, said the larger the stock market is and the more big blue chips there are, the less stock manipulation of the stock market will occur. In order to pave the way for the launch of stock index futures, Pan believes it is paramount to further expand the stock market scale and introduce more large-scale blue chips into the maturing Chinese stock market.

(The Daily Mail-Beijing Review Articles Exchange Item)

Hippocratic oath for politicians?
William Rees-Mogg

I WOULD have liked to hear a very different Queen’s Speech from the one Her Majesty delivered last week. I would have preferred a much briefer speech, which might have read something like this: ‘My ministers are aware of the burdens of legislation and regulation which have been laid on this country. ‘They share the anxieties of my distinguished forebear, old John of Gaunt: “England, bound in with the triumphant sea, whose rocky shore beats back the envious siege of watery Neptune, is now bound in with shame, with inky blots and rotten parchment bonds.” My government has decided Britain has too many laws already; it will not introduce any new legislation in this session of parliament.
‘It will devote the parliamentary time saved to the repeal of redundant and vexatious acts, and it will embark on a general review of the 80,000 pages of regulations of the European Union.’ I joined the House of Lords in 1988. Looking back over those 19 years, I’m struck by the contrast between the conscientious work of scrutiny and amendment that our House has performed and the questionable net impact of all this legislation on the lives of British people. Some laws are necessary and effective. My own guess is that of the laws passed in the past 19 years, a quarter would be justified by their results, half would have made little difference either way to human welfare, and a quarter would have done more harm than good. Other people would assess these proportions differently. My assessment adds up to a zero sum; the benefits have been equal to the drawbacks.
This seems to be the public view. Every member of parliament is only too familiar with the criticism that the voter has no way of influencing policy and neither has the MP. With the exception of Gordon Brown, David Cameron and Alex Salmond, that seems to be the uncomfortable truth about most political careers. There were always some voters who thought this, but two issues have made people particularly aware of the impotence of the modern House of Commons — let alone the House of Lords. The biggest change has been Europe. The British may have been right or wrong to hand over sovereignty to Europe in successive European treaties, but there’s no question that a large part of our sovereignty has been handed over. The Germans have calculated that more than 80 per cent of German legislation is determined by the European Union. The figure for Britain must be much the same. Very often, parliamentary or judicial decisions in Britain which appear to be independent are, in fact, determined by European decisions.
The private MP has no power to reject or amend these regulations, which in many cases have been passed by qualified-majority voting, with no British power of veto. Relative to European regulations, the House of Commons has become a second chamber, rather as the House of Lords, after the 1911 Parliament Act, became a subordinate chamber to the House of Commons. Before then, peers were figures of real power; now we are not. Members of the House of Commons were figures of real power before 1972; now they are not. The people have dropped even further behind in terms of influence. They were promised a referendum; Prime Minister Gordon Brown will not give it to them. The other issue that has undermined parliament in the eyes of the electorate has been immigration. This is an issue in which governments have failed. Immigration has not been controlled, or even accurately measured.
There has been far too little forward planning in respect of housing, education or health services. There is no social issue on which there is greater public concern. The inability of the state either to forecast the inflow of immigrants or to provide enough housing has undermined voter confidence in the state. No group has more reason for anger than small businesspeople. They are the only group to have had their corporation tax raised in Brown’s last Budget; they are the only group to have had their capital-gains tax raised in Alistair Darling’s first statement. Both these Budgets gave tax cuts to big business. Yet small businesses provide most of the new jobs created in Britain. They are heavily regulated by Europe, often as though they were billion-dollar corporations. Small businessmen often feel that the government is really the enemy, concerned to make difficult lives even more difficult. Almost all motorists feel the same. The latest proposal is to add extra points to speeding offences, which are automatically recorded regardless of road conditions or risk, so that a driver could lose his licence and livelihood for two offences.
I am told that doctors are no longer expected to take the Hippocratic oath. That is perhaps a pity, since the oath has a clause that states the doctor should ‘at least do no harm’. There ought to be a similar commitment for the political profession. All of these problems weigh most on the voters with whom the Labour Party feels no traditional sympathy. Labour has never had a feeling for the countryside. It takes the urban view that the countryside is not a working place but a green recreational area for town people at the weekend.

—Khaleej Times



High food prices could help very poor
Jonathan Power

MOST of the world’s poor live in the rural backwaters of Africa, Asia and Latin America. Most of them are small farmers or landless farm workers. The overwhelming majority of them are starting to benefit from the present rise in global food prices. Yet the cacophony of apparently “informed opinion” now giving vent is loudly moaning about food price rises. “There is a sense of panic,” says Abdolreza Abbassian, secretary of the grains trading group at the UN’s Food and Agricultural Organization. “The first global food shortage since the 1970s”, headlines the Financial Times. In Russia, price controls on basic foodstuffs have been imposed. The European Union has suspended its “set-aside” rules that ban farmers from planting cereals on 10 percent of their land.
This is economics as paranoia. The truth is this is a long overdue correction in the terms of trade whereby the urban minority of the world have long been subsidized by the poorest of the poor — those left behind in the remote reaches of the countryside. We should feel a bit less pity for these urban consumers. The majority of slum residents of Lagos, Shanghai, Rio de Janeiro or Bombay live longer and in better health than their rural compatriots. Their governments spend far more per head on them than they do on the small farmers and landless. Only 4 percent of foreign aid, according to the World Bank’s latest report, goes to the rural poor. Belatedly last month the World Bank has decided that improving economic growth in rural areas is by far the best way of reducing poverty among the world’s poorest people. What fortuitous timing — the market, in pushing up agricultural prices, is doing much of the job for it!
At least one UN agency, the International Fund for Agricultural Development, sees the picture clearly. Its remit has always been the small farmer. Shantanu Mathur, a senior official, tells me that his organization now “feels much happier than when food prices were going down”, as they have for the last three decades. “I believe the international community should take advantage of this rise to invest in good projects in the rural backwaters.” Mathur singles out two opportunities in particular. The first is the niche market of organic produce. More and more Third World farmers are being trained to take advantage of this. “It is very responsive to prices”, he says. The second is bio fuels. Mathur punctures another myth. “Bio fuels don’t have to be a trade off between food and fuel. It is the stalks that make the fuel. The grain on the plant can be used for food”.
History repeats itself — the first time as tragedy, the second time as farce — and too quickly too, as memories seems to shorten. The last time there was a sudden, and massive, jump in food prices was 1974 when US Secretary of State Henry Kissinger called for a World Food Conference. The conference was duly held in Rome and declared that “within a decade no child will go to bed hungry, no family will fear for its next day’s bread, and no human being’s future and capacities will be stunted by malnutrition”. Robert McNamara, then head of the World Bank and decided that the bank’s main focus would be on rural development. For a while much was done and McNamara’s enthusiasm infected many other Western aid agencies. But now 30 years later the bank confesses that its financing for rural areas has fallen from 30 percent of its total in the early 1980s to 10 percent today. The proportion of Western development aid targeted at the agricultural sector fell from 17 percent to 3.4 percent.

—Arab News