China: old style policy market meets new style risks

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Shanghai, Sep 27: to ensure a healthy market is a natural move as China aims to promote state sector reforms and social stability -- goals not normally invoked to justify government intervention in more mature markets.

Despite nearly three decades of economic reforms since 1979, including efforts to propel state firms to raise funds from the stock and corporate bond markets, most state companies still rely on banks for 90% of their fund-raising.

And to cushion discontent over the widening gap between rich and poor -- a worrying side effect of reforms -- Beijing is eager to raise the wealth of its people overall, partly through wider investment by the public in a stock market.

"The authorities' desire now is for a steady market, which would rise gradually in the long run in pace with economic growth," said Zheng Weigang at Shanghai Securities.

"To this end, they have increasingly used market means to guide investors -- a sharp contrast to the 1990s when Beijing used to resort to administrative steps to control the market."

Regulators now stress that raising investors' appreciation of risk is the principal means of preventing a market bubble, as stock valuations this month are nearing a record high of more than 60 times historical earnings, up from 16 times in late 2005.

They have chosen to increase the supply of shares with domestic equity offers, including an offer by China Construction Bank that raised a record $7.7 billion this month and an even bigger offer by China Shenhua Energy set for late September that could raise nearly $9 billion.