SHANGHAI: China has adopted a slew of policies aimed at boosting its long-suffering blue-chip stocks, mired at depressed valuations, but analysts say it will take years to change an investment culture focused on speculation in small caps.
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 “backdoor” listings via the purchase of listed shell firms on the smallcap board; encouraging richer cash dividend payouts; raising penalties for initial public offering (IPO) applicants that 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, would prevent a quick change in an investment culture that focused on small caps, analysts said.
Though many small-cap shares have performed poorly for years, trade thrives on rumours of pending restructurings or bailouts, most of which never actually occur.
Official data show that 81% 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 had largely failed, analysts said.
Low dividends are another problem. In theory, China’s gross domestic product growth rate of 7% to 8% should equal the long-term average return on assets across the economy. In this context, typical dividend yields of 3% to 4% for blue-chip Chinese stocks do not 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 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, was at 28 times. — Reuters
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