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Friday, August 26, 2005

China Privatizes State-Owned Firms to Help Lagging Stock Market

China is attempting to bolster its stock market by selling off stock in state-owned firms.  The goal is to signal that government interference in the stock market is ending, a problem that has limited investor’s willingness to participate in the market.  However, the sell off is largely small and poorly managed firms.  Key industries will still be owned by the state so this should not be interpreted, as noted in the article, as a signal that full-scale privatization is planned:

China to Allow More Stock Sales, by Peter S. Goodman, Washington Post:  China on Wednesday freed more than 1,300 largely state-owned companies to gradually sell shares of stock now controlled by the Communist Party government, putting nearly $270 billion worth of state assets on the trading block. This unprecedented wave of privatization is aimed at lifting domestic stock markets and furthering the country's transition toward capitalism...

The move is "a huge deal," said Stephen Green, senior economist at Standard Chartered Bank in Shanghai … which examines China's privatization. "The state-owned shares have been an albatross around the neck of the market. This is a pretty good sign that they're serious about reform."

Ever since China established its first stock exchange in 1990, Communist Party leaders have struggled to convince investors that they are running a real market as opposed to a capital-raising machine in which the government manipulates share prices to serve the interests of favored state firms. … Roughly two-thirds of the shares of listed firms remain non-tradable, locked in the hands of state-owned parent companies that are impervious to the interests of minority shareholders. The plan announced on Wednesday … is aimed at convincing investors that state interference is a relic of the past, with stock prices reflective of real values in a more transparent marketplace. … Analysts emphasized that the plan should not be construed as an indication that the government has embraced wholesale privatization. The majority of the companies that trade on the Shanghai and Shenzhen exchanges are small arms of giant firms that remain wholly controlled by the state, or inconsequential and poorly managed firms … The government's decision to put more of these shares into private hands does not signal an intent to relinquish control over the largest and most strategically important state-owned firms, which still dominate key sectors of the Chinese economy such as steel, auto-making, telecommunications and commercial aviation. "This is basically a mechanism to get the stock market to function, which it has not done in four years," said Arthur Kroeber, managing editor of the China Economic Quarterly. "This is the state privatizing junk that it's not interested in but retaining control over the core companies."… Analysts said the initiatives are aimed at making China's stock markets more attractive to investors, particularly foreign banks ... The control of listed firms by the state has fostered the sense that China's markets are beset by inside deals and shoddy corporate governance. And foreign investors have been reluctant to plunge in …

    Posted by on Friday, August 26, 2005 at 12:15 AM in China, Economics, International Finance | Permalink  TrackBack (0)  Comments (0)

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