Q and A on China A shares

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stlplace
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1. Chinese stock market has started in early 1990s and it has not done well until 2005. Why the China A shares market suddenly became so hot since then?
When the Chinese stock market started in the early 1990s, it’s a way for the state owned companies to raise the capital, and market speculators to make money. It’s not friendly to small shareholders because there are two types of shares in additional to floating shares: the state shares and Fa Ren Gu (legal entity shares); those shares can not be floated. Normally the majority shareholder is the goverment (or some Fa Ren) and they have no incentive to help the stock (floating shares) price go up because their shares can not float.

This all changed in 2005 in the Gu Gai (stock reform): during which the floating shareholder are compensated, and the state owned shares and Fa Ren Shares can be floated within a pre-arranged time frame, just like the share plan of big shareholders in the US stock market (unlock period). Now all the shareholders have aligned their interest. The big shareholder and management have incentive to deliver.

Of course another reason is people got lots of money: Chinese has a more than 40% saving rate; the emerging middle class; people made money in business and investing (housing etc.)

2. How can I buy the China A shares?
At this time the A shares are open to Chinese residents. For foreign investors, they can buy through the QFII (source: ChinaDaily), stands for qualified foreign institutional investors, e.g., Morgan Stanley etc.

3. Why some companies like to buy “shell”?
In China there is this listing requirement that a company needs to be profitable before it can list. Some companies that did not meet this req. but want to list, have decided to buy the shell of already listed companies. That will drive up the stock price of the “shell” company. It often triggered lots of insider trading. Buying “shell” is generally not as good as IPO. Lately the Chinese securities regulatory commission (CSRC, equivalent of SEC in the US) has tightened this “shell buying” activities. This makes economic sense to me.

4. Why the daily limit of up and down?
CSRC wanted to control the speculation activities in the market. The limit is 10% for regular stocks; 5% for S and ST stocks. (S means the stock has not gone through Gu Gai; ST means the company is not profitable).

5. Why the A share is signifcant higher than H share, when a company share is floated both in Shanghai and Hongkong?
It’s all supply and demand. Because Chinese people have too much money and too little stocks. Chinese Ren Ming Bi is not freely exchangable with USD. Nor can they invested in stocks outside mainland. The goverment latest “open H shares” policy will help closing the gap between A share and H share.

6. Why China opened the H shares to Chinese resident lately?
Refer to 5, people have another place to invest (win or lose); so that people won’t bid up the A shares like crazy; so that people won’t bid up the housing in China like crazy.

7. Why people can not short stocks?
Same reason as No. 4.

8. Why so many people, especially grandma and grandpas in the stock exchanges firms?
China is still at early stage of stock market; grandma and grandpa don’t have computers/Internet at home, they can use the trade stations at the trading rooms; it’s a good social place with free A/C, etc.

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