Friday, June 17, 2005

State Council to implement equities purchase plan

by Brian Turner

A senior Chinese official said Friday that China’s State Council will soon decide how to put into practice a plan for the government to purchase equities in order to restore confidence in the nation’s equities markets.

He said it was not a bail-out and pointed out that Hong Kong made a large profit selling shares it had bought in a similar plan to rescue its stock market during the Asian financial crisis of 1998.

Constructed by the People’s Bank of China, the recent declines in the Shanghai and Shenzhen markets and investor discontent with a plan to reduce government ownership in listed companies have heightened interest in putting the plan, which has been discussed for over a year, into practice.

While many analysts see the plan as crucial to China’s markets, share prices have fallen over worries about how the plan will work and that the market will be flooded with new shares.

The Shanghai composite index declined by 15 percent last year and is down sharply this year even though China’s economy is strong. Another part of the plan is for the People’s Bank of China to loan money to brokerages.

The government acknowledges that there is a risk of making brokerages dependent on such loans, but justifies them by pointing out the liquidity problems of brokers. According to the China Securities Industry Association, losses for 114 of 130 brokerages in 2004 stood at Rmb15 billion ($1.8 billion).

 

 

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