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 Since late November, regulators have unveiled a series of measures
aimed at raising the overall quality of listed firms and making blue
chips more attractive.
The measures include banning "back-door" listings via the purchase
of listed shell firms on the small-cap board; encouraging richer
cash dividend payouts; raising penalties for initial public offering
(IPO) applicants who exaggerate earnings forecasts; and setting
limits on first-day price rises for new shares.
But the dominant role of retail investors in China's equity market,
among other factors, will prevent a quick change in an investment
culture that focuses on small caps, analysts say.
Though many small cap shares have performed poorly for years, trade
thrives on rumors of pending restructurings or bailouts, most of
which never actually occur.
Official data shows that 81 percent of China's stock market turnover
came from retail investors in 2012, an indication that years of
regulatory efforts to increase participation of institutional
investors have largely failed, analysts say.
Low dividends are another problem. In theory, China's GDP growth
rate of 7 to 8 percent should equal the long-term average return on
assets across the economy. In this context, typical dividend yields
of 3 to 4 percent for blue-chip Chinese stocks don't look
attractive.
These factors help account for the unusually wide gap in valuations
between large and small cap stocks in China. The average
price/earnings (PE) ratio for the Shanghai Stock Exchange, which
hosts the bulk of China's blue chips, stands at only 11 times of
2012 historical earnings, while those for Shenzhen, dominated by
small caps, at 28 times.
By comparison, the average PE ratio for firms on the New York Stock
Exchange <.NYA> is 13, compared with 21 for NASDAQ <.IXIC>,
according to Thomson Reuters Eikon.
"There are still lots of factors to push investors to pursue quick
profits in small caps," said Guo Yanling, a senior analyst at
Shanghai Securities. "You cannot expect this immature market, with a
history of 20-plus years, to grow up to maturity overnight."
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OPPOSITE DIRECTION
While many of the new rules push investors towards blue chips,
others may have the opposite effect.
In particular, the resumption of IPOs which regulators suspended
last October to support the sagging market, could hurt demand for
them.
Since the establishment of China's stock market in 1990, IPOs have
been suspended eight times as a way to support prices of existing
shares. This time around, IPOs are expected to resume in January,
and the market demand is likely to be strong, at least at first.
"The market is very thirsty for new listings after a vacuum of over
a year," said a trader at a major Chinese brokerage in Shanghai.
"Everyone is eager to seek opportunities from new listings. Such
sentiment means no loss of enthusiasm."
In July 2009, when IPOs resumed after a 10-month hiatus, Sichuan
Expressway's <601107.SS> shares more than quadrupled from their
issue price in the first day of trading when they debuted in
Shanghai. Similar examples abound.
To prevent such a craze, the Shanghai and Shenzhen stock exchanges
issued rules this month to cap first-day price rises for
newly-listed shares at 44 percent above their IPO prices.
Tight liquidity conditions in China's money markets may also
discourage investors from shifting to blue chips. Tight money tends
to depress asset prices across the board, but large-cap stocks often
suffer most, since more funds are needed to support a price rise.
<CN/>
"Unless there is a super bull run, which is unlikely, to attract
money from other assets such as properties into equities, I doubt
there will be enough money for investors to shift their focus to
large-capitalized blue chips for now," said Chen Huiqin, analyst at
Huatai Securities in Nanjing.
(Editing by Jacqueline Wong)
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