Nontradable Deluge Set to Hit Markets

This week's release of 3.85 billion nontradable shares of various public listed companies in the Chinese stock market, valued at about 30 billion yuan by last Friday's market prices, is the first wave of the much talked-about scrip flood that threatens to drown whatever is left of investors' enthusiasm in 2009.
 

For months, the stock market was rife with speculation on the possible impact of the scheduled release of a total of 690.6 billion nontradable shares in 2009, a whopping 400 percent more than in 2008.
 

Many heavyweight constituent stocks of the lead indicator, including Industrial and Commercial Bank of China (ICBC), Bank of China, and Sinopec, have hundreds of millions of these stocks in the schedule.

Even at a much more modest scale, the flood of nontradable stocks in the market in 2008 was blamed by many stock analysts and investors for contributing to the crash that brought the key Shanghai Composite Index down 65.39 percent in 2008.
 

Because of the worsening economic climate and expected poor corporate performance, holders of the released nontradable shares are in no mood to hold.
 

"We are having hundreds of millions of new scrips in the form of unlocked nontradable shares overhanging the stock market," said Wu Feng, an analyst with TX Investment Consulting.
 

Indeed, the stock market fall in the past several days was largely attributed to the unlocking of the first batch of nontradable shares this week, until the leading economic data released on Wednesday was better than expected.
 

Stock analysts hope the impact of the scrip flood can be mitigated if State-owned enterprises can be persuaded to hold onto their unlocked tradable shares.
 

"The combined unlocked nontradable shares of ICBC and Bank of China account for 91 percent of the total," said Xu Peng, an analyst with CITIC Securities. These shares are largely held by State-controlled entities which have much less of a need to divest in a hurry, Xu said.

Li Rongrong, chairman of the State Assets Supervision and Administration Commission, last week encouraged large stakeholders of State-owned companies to continue to repurchase their shares in the open markets to drive the healthy development of capital markets.

The largest amounts of nontradable shares are scheduled to be unlocked in July and October.
 

Analysts said the government would most likely have to introduce measures to help stabilize the market in the face of a flood of new scrips of such gigantic scale.
 

A suggestion gaining support among stockbrokers and institutional investors is for the government to set up a fund specifically for the purchase of newly unlocked nontradable shares in the open market, according to Nicole Yuen, head of China Equity at UBS Securities Asia.