Dynamic markets set for another round of changes

CHINESE mainland stock markets witnessed some dramatic changes in the past year with the combined market value nearly doubling and the size of institutional investors soaring. This year, more financial derivatives and trading system adjustments are set to begin. Here are the key words of the mainland capital sector for 2007 and 2008.

1. Tightening policies

China raised its benchmark interest rate six times and demanded commercial banks to set aside more money in reserves 10 times last year as part of its efforts to rein in excess liquidity and prevent stoking up asset inflation.

2. Return of H shares

A string of Hong Kong-listed Chinese companies floated shares back on the mainland stock market last year as they rode the domestic stock rally to raise funds for expansion. The listings of these industry giants, including China Life, China Construction Bank and PetroChina, have significantly boosted the total mainland market capitalization.

3. Stamp duty hike

The Ministry of Finance on May 30 hiked the stamp duty on stock transactions from 0.1 percent to 0.3 percent. The move has dealt a heavy blow to the benchmark mainland stock indices in the following month, effectively damping share prices of companies that don't have solid fundamentals.

4. Mutual funds

The combined size of Chinese mainland mutual funds has jumped to more than three trillion yuan (US$411 billion) last year from 800 billion yuan at the beginning of 2007. Sales of mutual funds heated up in the middle of last year when the key indices topped record highs as investors channeled money from low-yielding bank savings to the red-hot securities market.

5. Crackdown on stock-related crimes

Financial authorities revved up bids to combat securities-related crimes last year as cases involving insider trading and market manipulation spooked investors. A slew of corporate executives, stock analysts and investors have been punished due to financial wrongdoings related to listed firms.

6. China Investment Corp

In September, China established a new agency to manage part of the country's huge foreign-exchange reserves. The company, called China Investment Corp, was given US$200 billion to invest in overseas equity markets as the country hopes to boost the returns of its forex reserves and diversify risks. The Ministry of Finance issued special bonds to buy the reserves from the central bank.

7. Expansion of the QDII program

The stock regulator in June issued new rules to allow fund managers and brokers to invest clients' capital in overseas securities under the Qualified Domestic Institutional Investor program in a bid to expand the business dominated by banks. The new products launched by fund managers were welcomed by retail investors. However, these funds failed to stage satisfactory performance as they suffered losses by investing heavily in Hong Kong-listed shares.

8. Delay of the "through train" initiative

China's foreign-exchange regulator on August 20 announced a pilot program, also known as "through-train," under which nationals with a Bank of China Ltd account in Tianjin would be allowed to buy Hong Kong equities. But the program's launch has been delayed on regulatory jitters over market instability amid possible investment speculation. Premier Wen Jiabao said on November 3 that the government needed more time to assess the risks to the stability of Hong Kong's financial system.

1. Key index to top 10,000?

Industry analysts expect the Shanghai Composite Index to continue to climb in 2008 after nearly doubling last year and jumping 130 percent in 2006. Although a majority of market observers believe the upside room is limited, some bold analysts predict the index can double again and reach 10,000 points.

2. Launch of the stock-index futures

China has been preparing for the launch of the nation's first stock index futures contracts since late 2006. The initiative has been postponed due to worries over investor education and technical facilities. Industry experts widely expect the derivatives to be unveiled in the first half of this year.

3. Set-up of the country's growth board

Financial authorities are on track to establish a Nasdaq-like growth board in Shenzhen in the first half of this year. The board is likely to host a myriad of high-tech start-up firms, which need capital, but can't meet main-board financial requirements.

4. The return of red chips

A raft of Hong Kong-listed red chips, or overseas-incorporated Chinese mainland firms, are expected to issue yuan-backed shares on the mainland bourses this year as regulators loosen rules to boost market value. Companies including China Mobile are set to raise billions of yuan by tapping the mainland investment frenzy.

5. Official launch of the "through train" program

Although it has been delayed from last year, industry watchers widely expect the "through train" program to kick off this year to let mainlanders trade Hong Kong-listed shares on a trial basis.

6. Possible plan to reform B shares

A plan to deal with the split share structure of the mainland stock markets may be introduced. The tiny foreign-currency B-share market is likely to be merged with the yuan-denominated A-share market as early as this year.

7. Issuance of covered warrants

Stock regulators are set to allow brokers to issue warrants over the shares of any listed companies, also known as covered warrants, in the first half of this year to boost supply of the derivative.

8. "T+0" trading mechanism to be set on blue chips

The mainland stock exchanges are expected to loosen daily trading limits on blue chips for the first time this year. The Shanghai Stock Exchange is likely to allow investors to sell some blue chips the same day they buy them to bolster turnover. Presently, investors can't sell mainland securities on the same day of the purchase.