An Introduction to

China’s Stock Market

April 21, 2004

Ying Tan and Dan Gao

Profile of China

Full Country Name:

The People's Republic of ChinaArea: 9,600,000 sq kmPopulation: 1.24 billionCapital City: Beijing (pop 12 million)

Profile of China People: Han Chinese (93%), plus Mong

olian, Zhuang, Manchu and Uighur ethnic groupsLanguage: Putonghua (Beijing dialect mandarin)Religion: Officially atheist; Confucianism, Buddhism, Taoism (no stats available); Muslim (14 million), Christian (7 million)

China’s GDP Growth

GDP(1978- 2003)

0

5

10

15

1978 1982 1986 1990 1994 1998 2002 Year

US$ 100 Bi l l i on

China’s Economic Forecast

C o nsu m p tion Inv e s tm e nt E x p o rts

E c o nim icC y lind e rs

Financial System

• People's Bank of China• (Central Bank)

• Monetary Policy

• Banking Regulatory Committee • Insurance Regulatory Committee • Securities Regulatory Committee

• Banking System • Insurance Market • Securities Market

Exchange Rate ChangesExchange rate

0100200300400500600700800900

1000

1981 1985 1989 1993 1997 2001Year

( RMB/ US$100)

Exchange Rate System• Market-based, single and managed

floating exchange-rate system

----Convertibility of RMB current accounts

----Partially convertibility of RMB capital accounts

Financial Market

• Money market: CHIBOR

• Capital market:

bond market

stock market

China’s Stock Market (outline)• Why shall we know the market• Brief history• Share category and market structure• A-share market (feature, investors)• B-share market• Overseas share issuance• Problems• Market today

Why shall we know the market?• The 8th largest stock market in the world

with market capitalization of $750bln.

• A fast growing market

• Great opportunity (World Expo and Olympics)

• Career opportunity (QFII, WTO)

• Friendship

Market Trend (1990-present)

Brief History• Started in Dec 1990 with only 8 listed

stocks

• Stock market fever 1992-93

• Dull years, 94-95: the creation of non-tradable shares and quota system.

• A promising but false start: 96-97

• Growth with CSRC in charge, 1998-2002

Share Categories• Non-tradable shares a. Legal person shares b. State-shares• Tradable shares a. A-shares: denominated in RMB (1264) b. B-shares: denominated in US$ and HK$ (53,57) c. H-shares: PRC-registered listed in HK d. Red-chips: Chinese companies registered overseas and listed abroad

Features of A-share market

• High P/E ratio (40 times)

• Still a supplementary sources of funding

(100bln)

• Still dominated by government’s intervention

Investors on A-share market

• Individual investors (20m-40m vs 1.3bln): used to dominate the market (S/T speculation I/O L/T professionally managed investment).

• Institutional investors: securities companies(100) , trust and investment companies, investment funds (20, 10%,80%), insurance companies, assets management companies.

B-share market• Started in 1991 as a category of shares exclusively

for foreign investors. In early 2001, Chinese individuals with forex accounts were allowed to buy B-shares.

• By the end of 2003, 112 firms had issued B-shares and raised RMB38.2bln of funds only.

• Same shares with different prices and rights.• It moves with A-share markets and is very illiquid.

Overseas Share Issuance

• By the end of 2002, 75 PRC-registered companies had listed shares in HK (H-shares), NY and London, raising $20.4BLN.

• Nearly 60 red-chips are listed in HK.

• By mid 2002, 31 mainland companies and 9 HK red chips had issued ADRs in US with 14 listed on NYSE.

Problems

• Poor regulation

• Poor accounting and auditing system

• How to deal with the non-tradable shares?

A-share market in 2004• A bullish market• Reason:1. Expected 8.5% GDP growth in 20042. SOE saw good performance in 20033. Int’l investment banks increase their holding of

Chinese-concept shares4. Negative real interest rate5. Expectation of RMB appreciation, large foreign

capital inflow

Chinese Stock Miracles• One fourth of Chinese stocks listed in NY e

xchange appreciated by 100%• Chinese Enterprise index in HK exchange r

ose up to 5000 from 2000 early in 2003• Sina, Sohu and Netease stocks rose twentyf

old in NY exchange• Buffett is the major shareholder of PetroChi

na

H Shares !HSI—Hang Seng Index 33

HSCEI—Hang Seng Chinese Enterprises Index

Beat the market!• Chinese Stocks in NASDAQ

Percentage changes of pri ces i n 2003

-100. 00%

0. 00%

100. 00%

200. 00%

300. 00%

400. 00%

500. 00%

600. 00%

700. 00%

2/11

/200

3

3/11

/200

3

4/11

/200

3

5/11

/200

3

6/11

/200

3

7/11

/200

3

8/11

/200

3

9/11

/200

3

10/1

1/20

03

11/1

1/20

03

12/1

1/20

03

1/11

/200

4

2/11

/200

4

Year

Perc

enta

ge Nasdaq I ndexSi naSohuNetease

Why do the prices of Chinese stocks skyrocket?

• Direct factors: Many large investment institutions and banks flock to

purchase Chinese stocks; Most of Chinese listed companies have relatively high

EPS; Individual investors are bullish on the stocks only because

they are from China Mainland.

Why do the prices of Chinese stocks skyrocket?

• Indirect factors: The prospect of the constant 7% economic growth in

China; China has caught the eyes of the world; Beijing’s 2008 Olympic Games and Shanghai’s 2010

World Expo; The satisfying learning-by-doing performance of Chinese

government in terms of economic development;

Sagas of listed Chinese companies• BYD Co. Ltd. - H Shares

stock pr i ce

101214161820222426

2/11/2003

3/11/2003

4/11/2003

5/11/2003

6/11/2003

7/11/2003

8/11/2003

9/11/2003

10/11/2003

11/11/2003

12/11/2003

1/11/2004

2/11/2004

Year

HK$

stock pr i ce

BYD Co. Ltd. - H SharesFinancial indicators (ended 31/12/2002)

EPS RMB 0.9333 

Net asset RMB 2,571,417,000

Net Profit RMB 658,303,000

P/E ratio 27.00

Market Capitalization: US$ 1 billion

• BYD COMPANY LIMITED was founded on February, 1995, specializing in research, manufacture and sales of rechargeable batteries.Its main products include Lithium-ion batteries , Nickel-Cadmium batteries and Nickel-Metal hydride batteries. BYD moved to the new industrial park in September of 2000, which locates in ShenZhen, China. It covers an area of 374,000 square meters, and over 15 thousand employees work there.

Dotcom companies in NASDAQ Exchange

Sina.com & movie star

I will sell Sina at $45!I wanna b

uy Sina stock at$2!

Ziyi Zhang Daolin Mao

A bullish market?

Stock bubble?

Or foolish investment?