Friday, March 07, 2008

China's CSRC: market regulator, or market meddler?

Who ended the peaceful rise of China's stock market, once considered a safe place for investors to double their money every year?

Many blame life insurer Ping An Insurance, whose Chinese name means, ironically, peace and safety.

To be fair, Chinese stocks had fallen hard as a result of some bigger problems, but Ping An stands accused of pouring salt into the market's wounds in January by announcing plans for a massive $17 billion share offering.

Ping An's shares sank, pulling the Chinese stock market down with them to a one-year low amid concern that the market could not absorb the new capital.

Officials at the China Securities Regulatory Commission (CSRC), seeking to revive the sagging index, declared that companies should "on no account maliciously seize money from the market", vowing to "strictly" examine fund-raising applications.

But is Ping An really at fault? Its capital-raising is ill-timed from the regulator's perspective, but any listed company's goal is to maximise shareholder value. If Ping An just wants to take advantage of its lofty valuation and raise some cheap money, what's wrong with that?

Regulators shouldn't fine-tune every twist and turn in the market. Instead, they should let investors send buy and sell signals to companies as they see fit. Meddling by regulators can shift the balance of the market, add uncertainty and possibly even hurt shareholders' interests.

If Ping An's shareholders do not want the company to indulge in one of the world's largest secondary offerings after a 20 percent fall in the local market, they will block it on Wednesday at a shareholder meeting.

But if demand for the shares is weak and new shares are priced cheaply, a stock sale could provide a good buying opportunity for long-term investors, said Chris Tang, a fund manager at Marco Polo Investments.

"Maybe it is best for the market to find its equilibrium and let investors decide whether they want to support any new offerings," Tang said.

Ping An plans to announce the result of the shareholders' vote, part of which will be conducted online, late on Wednesday or on Thursday, executives and spokesmen for the firm say.


History has shown that controversial capital raisings can benefit investors in the long run.

In 2003, China Merchants Bank went through a similar saga when it announced the largest secondary offering in China. But investors who bought into it would have profited handsomely, as the stock has since risen by some 500 percent.

For years, the CSRC has acted like an overbearing parent, apparently thinking local investors are too naive or unseasoned to make their own decisions.

Regulators decide when investors should buy by allowing new stock funds to issue shares when they believe the market needs a boost, and halting new issues for months at a time if they think the market needs to cool down.

For example, after a five-month hiatus, it rushed seven stock funds to the market in February alone, trying to give a shot in the arm to the sagging index.

At the same time, the CSRC should focus on its main duties -- pressing companies to disclose more details of their financial performance and cracking down on insider trading.

"The regulator is managing many things that it should not manage; but for the things that they should control, they are not doing enough," said Lan Xue, head of China research at Citigroup. "China is back-pedalling into the planned-economy mode, this is very discomforting."

China has benefited from a long stretch when it let the market decide on the supply and prices of almost everything from eggs to electronics. But after inflation hit an 11-year high last month, Beijing suddenly imposed price freezes on certain essential goods.

The government's increased intervention has now raised expectations that Beijing cannot let shareholders lose money, especially in a high-profile year when Beijing hosts the Olympics.

Chinese shareholders think it is the government's responsibility to ensure their portfolios perform well. Why wouldn't they? When crunch-time comes, Beijing seems unable to refrain from the knee-jerk response of state control.

That sort of thinking of course is a moral hazard and does not do the market any good. The CSRC should loosen its grip on China's capital markets. Until that happens, investors can't expect much "ping an".

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