China's Tantalizing Stocks

January 24, 1994|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- They built the presses that print the People's Daily newspaper. They forged the steel that powered the Great Leap Forward. They pressed the tools used to equip the People's Liberation Army.

And now, China's state-run enterprises are churning out stocks for hungry Western investors. Last year, six industrial behemoths listed their stocks on the hot Hong Kong stock exchange, raising $1 billion in hard currency. The stocks have also performed well; only one is trading lower than its issue price. The others are up anywhere from 14 percent to 129 percent.

But all these shares are down about 20 percent off their peaks of a month ago as concerns have grown that they are overpriced and that their accounting and reporting standards are inadequate.

With China planning to list 20 more companies on the Hong Kong stock exchange, Chinese and Hong Kong officials have been touring the globe trying to allay investors' fears and drum up support for Hong Kong's market and the new Chinese shares.

"We still have a long way to go," Liu Hongru, chairman of the China Securities Regulatory Commission, said at a recent presentation in New York. "Disclosure is still lacking, and there we do have to work harder. But I think the opportunities are there for investors."

Mr. Liu and officials of the Hong Kong stock exchange journeyed to both New York and London in the past several weeks, giving pep talks to investors eager to get a piece of China's 13 percent economic growth and 23 percent growth in industrial production.

In addition, Mr. Liu was also in Washington last week to meet with his counterparts from the Securities and Exchange Commission.

The SEC has agreed to help Mr. Liu's organization revise securities laws to give investors more rights and protections.

China started issuing shares that foreigners could buy in 1992 on its two exchanges in Shanghai and the southern boom town of Shenzhen. These "B" shares, however, lack liquidity, and few Western investors have been willing to invest much in them.

Mr. Liu said that B shares in 52 companies were available in 1992 and that 178 were available last year. But total market capitalization for all shares combined was still less than $100 million -- far too small to interest big Wall Street stockbrokers or mutual funds.

To attract the big investors, China issued the six "H" stocks in Hong Kong last year, Mr. Liu said. With the world's seventh-largest stock market and a market that has risen nearly VTC 94 percent over the past year, the shares would be trading in a more liquid and modern market.

The shares are also supposed to meet international accounting standards and have outside directors on their boards.

Recent developments, however, suggest that these companies are less than transparent. In October, for example, Tsingtao Brewery refused to release quarterly financial reports, something the Hong Kong stock exchange does not require.

And another big listed company, Maanshan Iron and Steel Co., has received some unfavorable reviews because it must rely on fickle politicians in its home province for the money it needs to modernize its machinery.

"Investors should be extremely wary of these new issues," said Jay Gottlieb, publisher of New Issues Outlook in New York. "The potential in China is real, but what you're seeing here is a frenzy."

Indeed, the shares of all six Chinese companies on the Hong Kong exchange rocketed in initial trading. Shares of Tsingtao, the beer brewer that has signed a joint venture with the Anheuser-Busch Co., were oversubscribed 30 times. But after reaching a peak in early December, Tsingtao's share price has fallen 24 percent.

"Those stocks are too turbulent for us," said Charles De Vaux, an analyst with the New York-based Sogen Fund. "One guy in China says something, and the prices bounce all over the place."

Hong Kong, however, remains one of the better ways to participate in China's rapid industrialization, said Peggy Farley, managing director of Amas Securities Inc. in New York. "China is more for speculators, but you can find some good companies in Hong Kong that have exposure in China," Ms. Farley said. "That's a safer bet."

Hong Kong officials said they are trying to modernize their exchange so that American investors will feel more comfortable putting their money in local stocks.

The exchange is experimenting with a short-selling rule and has implemented a modern computer settlement system similar to the one used by the New York Stock Exchange, said Michael Wu, executive director of the Hong Kong Securities and Futures Commission.

In addition, Hong Kong has taken the lead in improving China's securities laws, having recently signed a five-party memorandum agreement that would boost protection for investors in mainland China, Mr. Wu said. This will be especially important when Britain returns Hong Kong to China in 1997.

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