Beijing has been acting over the last few months to try to slow down the run-away growth in share prices which resulted from its partial opening up of the A-Share and B-Share markets in the last year. On Monday last week it dashed hopes that it was about to take its foot off the brakes by saying that it was continuing with measures to dampen demand.
Shanghai A-Shares, which are available only to mainland investors in domestic currency, doubled last year but the index has fallen 7 per cent so far this year.
Shanghai B-Shares, which are available only to hard-currency buyers, and were (at least officially) off-limits to domestic Chinese until earlier this year, trebled in value when the market was opened up. But Chinese financial market and banking regulators have launched probes into illegal purchases by mainland investors of stock in Hong Kong and the use of bank credit for stock market speculation, helping the market to fall 32% so far this year from its high of 240 in May.
The smaller Hong Kong market in H-shares, available only externally, has fallen in sympathy from 600 to 450 this year.
A Goldman Sachs report said: 'China's domestic A and B shares are over-extended in terms of valuation. Average prices to earnings multiples, ranging between 45 times and 60 times, are out of line with fundamentals and we feel this is unsustainable.'
Slack mainland controls have contributed to the unjustified boom. Last week the blue chip biochemical firm Guangxia (Yinchuan) Industry saw its shares suspended pending an investigation into allegations that a subsidiary falsely reported exports of US$82m in 2000 when the actual figure was US$33,571.
The People's Bank of China, the central bank, is said to be studying allegations that commercial banks illegally channelled funds estimated at US$60bn into the stock market. That is no news: the foreign currency balances of mainland residents were known to exceed $110bn earlier this year, and the B-share and H-share markets represented easy targets for this money.
Investors also fear a deluge of stock when the 70 per cent of the shares of listed companies still held by the Chinese government hands hits the streets.
The Beijing government's preoccupation with the existing markets has however distracted its attention from the need to establish a capital-raising mechanism to fuel the insatiable growth of emerging high-technology centre Shenzhen, bordering Hong Kong, which has been waiting for more than a year for the go-ahead from Beijing to establish a new Nasdaq-style exchange.
"I think there will be a huge impact on China's venture capital market if the board is further delayed," said Kan Zhidong, the vice-chairman of the Shenzhen Venture Capital Company.
"The second board is very important: it's for innovators who can give the economy a new engine of growth (apart from the state sector)," said Joe Zhang, of UBS Warburg in Hong Kong.
China Regulatory Securities Commission's boss, Zhou Xiaochuan, said the regulator would not be deterred from its clean-up by falling prices on the existing exchanges, so it's unlikely it will be giving permission to Shenzhen to get started anytime soon.
Still, the CRSC did approve next month's launch of China's first Western-style open-ended fund, giving the go-ahead for the Huaan Chuangxin Fund with an initial value of five billion yuan (about HK$4.69 billion), the Shanghai Securities News reported.
The fund, run by China's Huaan Fund Management, would be sold to Chinese retail and institutional investors, initially with 60 per cent made available to individuals and 40 per cent to institutions.
"The launch of the Huaan Chuangxin Fund will add new investment tools and open new liquidity channels," the newspaper said.
Huaan Fund Management said the threshold for individual investors to bid for the new open-ended fund was 10,000 yuan with a maximum of 300,000 yuan.
The minimum requirement for institutions was 300,000 yuan, with a cap of 500 million yuan.
China already has nearly 40 closed-end securities mutual funds with a combined value of about 80 billion yuan.
China prohibits foreign fund-management firms from operating in the domestic share market but has pledged to allow Sino-foreign joint-venture fund firms equal access to the market after it joins the World Trade Organisation, so it probably has one eye on the need to strengthen domestic fund management in the run-up to WTO entry. All existing funds - including the new open-ended fund - target domestic investors and A-share markets, off limits to foreign investors.
Overseas asset managers have therefore signed a series of pacts to advise Chinese companies on fund management with an eye on forming joint ventures to tap the massive domestic A-share market, with capitalisation of more than US$600 billion.
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