Bullish feeling

Silver lining

Though there were several tightening measures last year, the government continued to maintain that the stock market was still the main funding channel for enterprises' financing.

Though some companies have shelved or put on hold listing plans, many others are expected to tap the domestic and overseas markets this year due to the market rally.

For most of these companies, raising funds from the capital markets seems to be a much more sound proposition than borrowings from banks and other financial lenders.

Aggregate corporate debt has already exceeded 110 percent of GDP, compared with the 90 percent ratio that is widely considered to be the upper limit or safety margin, says Yin Zhongli, a senior researcher at the Chinese Academy of Social Sciences.

This leaves little room for further leveraging by enterprises, Yin says, adding that any large-scale program to fuel economic growth with easy credit would backfire badly on the economy.

For these reasons, "it is hard to understate the importance of a healthy stock market to the economy in general and the corporate sector in particular", Yin says.

Moderate recovery

China's gross domestic product grew 7.8 percent last year, a 13-year low and considerably lower than the 9.3 percent of 2011, the National Bureau of Statistics says.

Although most of economists were unanimous that the Chinese economy was facing downward pressure in 2012, with some even predicting a hard landing, the actual numbers indicated a better than expected performance.

The data also showed that the consumer price index, the main gauge of inflation, was 2.6 percent, far lower than the government's target ceiling of 4 percent.

The robust indicators also prompted many experts to issue optimistic outlooks for 2013.

"The big picture is that China has avoided a hard landing and has engineered a gradual rebound of its growth, from the second quarter of last year," says Dariusz Kowalczyk, senior economist with French retail banking group Credit Agricole. "The strong mandate received by the new leadership is expected to give a further boost to confidence as expectations are that they would give a new impetus for growth with new development goals."

According to Qu Hongbin, chief economist of HSBC China, China's economic growth this year is likely to be around 8.6 percent despite the uncertain external market conditions. A rapid rebound in inflation is unlikely, he says.

Bank of Communications also issued a report recently, expecting GDP growth for 2013 to be 8.5 percent, as long as the country is committed to economic reform. Supported by an investment stimulus as the new government takes over, along with a recovery in exports and stable growth in consumption, the economy will grow faster this year than in 2012, the report says.

"I am optimistic about the market, but yes, there are some potential risks," says Rein of China Market Research Group.

The biggest challenge for policymakers would be to come out with steps to stimulate consumption, he says.

The National Bureau of Statistics had earlier indicated that consumption last year had surpassed investment to become the largest contributor to the economy's growth. Its contribution to GDP was 51.8 percent, as opposed to 50.4 percent from capital investment, while the contribution from net exports was a negative 2.2 percent.

All of these show that rather than chasing an increasing speed of growth, the government is now more focused on rebalancing the economy and restructuring growth.

The HSBC flash purchasing managers' index rose to 51.9 last month, the highest since January 2011 and above the 50-point level that shows accelerating growth in the sector from the previous month.

Open doors

Guo Shuqing, chairman of the China Securities Regulatory Commission, told a forum in January that China will increase quotas for so-called qualified foreign institutional investors and the local-currency denominated renminbi qualified foreign institutional investors (RQFII) schemes 10-fold, although he did not specify a time frame.

"QFII has been stabilizing the market," Guo said. He said China wants large foreign institutions to put money into Chinese shares. "Because these investors are more professional, they will also invest and keep the money in China for a long period," he says.

Foreign money now accounts for just 1.5 percent of the overall mainland equity market. A 10-fold increase in the QFII and the RQFII schemes would translate to about $400 billion in new funds flowing into the market, now worth $38.5 billion, a very likely possibility, says Howhow Zhang, an analyst with the Shanghai-based boutique consultancy Z-Ben Advisors.

"If you look at other emerging markets such as India, Brazil and Russia, foreign participation is between 10 percent and 20 percent. In China, the current quota is tiny, so a 10-fold increase is not an exaggeration."

The CSRC has in fact been pushing forward reforms in the stock market over the past years, including cutting trading taxes, urging companies to pay cash dividends, and improving the delisting system.

The whole market has become more stable in the past three years. There has been a significant improvement in the valuation system. Although stocks for big companies are still undervalued, things are changing for the better, Guo says.

Contact writers at xieyu@chinadaily.com.cn and gaochangxin@chinadaily.com.cn

(China Daily 02/22/2013 page1)