SOEs lead fall in stock market

Investors track stock prices at a brokerage in Huaibei, Anhui province. State-owned enterprises took up 80 percent of the positions in the top 100 companies that suffered the most severely from falling share prices this year. [Photo / China Daily]

State-owned enterprises led the fall in market value in China's A-share market in 2013, as equities went through another tough year.

The benchmark Shanghai Composite Index dropped by 0.18 percent, ending at 2,097 on Monday, marking a 7.9 percent drop year-to-date.

By last Monday, a total of 811 listed companies had seen their market value decrease from the start of the year, according to Wind Information, a financial data provider.

SOEs took up 80 percent of the positions in the top 100 companies that suffered the most severely from falling share prices.

Among the top 10 companies hit by the biggest market loss of value, six were SOEs, including three State-owned energy giants, PetroChina Co Ltd, Shenhua Group Corp Ltd and China Petrochemical Corp (also known as Sinopec), two national lenders - Industrial and Commercial Bank of China and Bank of China - and China Life, the nation's biggest insurerin terms of assets.

Market value had shrunk by 820.2 billion yuan ($134 billion) for the above six companies by last Monday, according to Wind.

On the other hand, thanks to the solid performance of the Growth Enterprise Board, China's Nasdaq-style market, total market capitalization of the A-share market grew by more than 400 billion yuan.

The misallocation of capital in China's economy has lasted for more than 10 years, partly because of the inefficient operation of some large SOEs, while small companies with innovation ability and growth potential are thirsty for funds, said Xin Yu, president of Zequan Investment based in Guangzhou.

"The authority has been promoting reforms in large SOEs and adopted policies aiming to boost blue chip prices, but in China's equity market, speculation in small caps is still popular," Xin said.

Zong Ke, partner of a private equity company based in Shanghai, said: "It is no surprise that the SOEs gave another disappointing performance. It is caused by systemic problems that have yet to be tackled."

Earning ability is the first concern, Zong said.

"Big SOEs, especially those in cyclical industries, are hit by the slowing down of economic growth, overcapacity and inefficient growth patterns," he added.

Coal mining, other mining, drink production, non-ferrous metals and insurance are the five sectors seeing the biggest decreases in market capitalization, while the banking sector saw the largest volume decrease in capital value.

The authorities' reiterated determination to curb air pollution has raised the prospect of a long-term decline in China's need for thermal coal. China plans to reduce coal's share in the energy mixture to 65 percent or less by 2017 from 73 percent this year.

China's A-share indexes bottomed in November 2008, plunging 70 percent from their peak in October 2007. They have been bearish in subsequent years.

Some investors see a "buy" signal here, because the stock market appreciation seems so limited compared with economic growth. However, it is common for price and valuation to match in this market. Low-priced shares may stay flat or fall, all causing investors to lose money, Zong said.

Because China's leaders repeatedly stress a slower growth rate is acceptable in the face of the urgency to wean the economy off dependence on investment and exports, investors are quite cautious about the prospects for the stock market here in 2014.

"We expect the economy to be forced to deleverage in the first half of 2014 because of the rapid development of interest rate marketization and prevention of debt risks. As a result, interest rates will likely rise, leading to tight liquidity for the A-share market. In addition, IPOs may pump liquidity out of the primary market," said Chen Li, chief China equity strategist with UBS Securities Co Ltd.

He recommends that investors avoid sectors that are sensitive to fund fluctuations, as well as traditional cyclical sectors with high liability ratios.