Even though rumours that the government will soon restart selling off their holdings of State-owned enterprise (SOE) shares have been chilling the market, stock prices have rallied again along with investors' high expectations.

Two stockholders chat in a stock exchange in Shanghai in this undated file photo. [newsphoto.com.cn]

The market will continue its U-shaped trend, returning to a bullish phase next year, according to analysts.

"The rumours caused some short-lived jitters in the market, but they were soon neutralized by more good news," Liu Jingde, a senior analyst with Beijing Securities Co, told China Business Weekly.

China's State-owned Assets Supervision and Administration Commission (SASAC) published guidelines for State-owned asset reforms two weeks ago.

Li Rongrong, chairman of SASAC, then announced that State-owned shares "should not be sold below their net asset value per share."

Li's remark was immediately interpreted by the market as a hint that the government will soon re-launch its already shelved proposal to float State-owned shares.

An official with the China Securities Regulatory Commission, when reached by phone last week, said no detailed proposals are ready to be released.

SASAC declined to make any comment.

China's domestic A-share markets reacted negatively to the news and edged down for five straight trading days after Li's remark.

"Any news on the possible unloading of State-owned shares will have the effect of rattling investors' nerves," said Liu.

About two-thirds of the total shares of China's listed companies are non-tradable and the government holds a large part of these shares.

Should they start to trade in the market, the flood of shares would dry up funds and cause current prices to plunge, Liu said.

"But the market inched up again a week later because good news about the macro-economy bolstered investors' confidence," Liu said.

China's gross domestic product (GDP) is expected to post a stunning rise of 8.5 per cent this year.

The economy is expected to continue to power ahead next year, with even the conservative official growth forecast coming in at more than 7.5 per cent.

A stronger economy will translate into healthy corporate earnings.

Per-share earnings of China's listed companies reached 0.26 yuan (3.1 US cents) in the late 1990s but declined to as low as 0.14 yuan (1.7 US cents) last year, according to Liu.

The benchmark level has, however, recovered and bounced back to about 0.2 yuan (2.4 US cents) this year and will likely be higher next year, Liu said.

The economic prospects for next year are rosy, as both industrial raw material prices and consumer prices are on the upswing.

Steel, the most commonly used industrial raw material, has seen its price rise by 20 per cent this year.

The consumer price index (CPI) rose 3 per cent last month compared with the figure for the same period a year ago, after growing 1.8 per cent year-on-year in October.

"The disposal and recovery of non-performing assets in the banking system will also offer strong support to the country's stock market," Liu said.

Although an estimated 2 trillion yuan (US$241.5 billion) worth of bad assets are still haunting China's banking firms, the total amount will likely dwindle in the next few years, experts said.

The country's asset management companies, which were established in the late 1990s, have recently speeded up the process of disposing of the banks' bad assets.

Huarong Asset Management Co, teaming up with the international investment giant Morgan Stanley, announced last week the sale of bad assets with a face value of over 25 billion yuan (US$3.02 billion).

The Chinese Government announced two years ago a plan to sell its holdings of non-tradable shares.

This beat down market confidence and caused an immediate flight of investors' funds.

Although the government halted the fire-sale weeks after the proposal was released, it triggered a year-long decline in the market.

The government reaffirmed its stance earlier this year that State-owned shares will have to be sold to finance the construction of a sound social security system.

But this time, government officials have said that these shares will most likely be sold through the over-the-counter market or by negotiations rather than in the stock markets.

"The government will find it a formidable task to balance the interests of both the State and the investors, if it sells State-owned shares in the market," said Pi Jiancai, a financial expert with Fudan University, adding that "pricing is the key."

But although holders of non-tradable shares have the same voting rights as holders of tradable shares, stock market investors will nevertheless feel that the sale of non-tradable shares is unfair, experts said.

It is not good for the market's future development.

"Making most, if not all, of non-tradable shares eventually tradable is a responsibility the government must undertake," Pi said.

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