However, in spite of the delay, investors remain positive about the A-share markets. Buyers have pushed both the Shanghai and the Shenzhen A-share indices well above the peaks set at the end of February. The sharp dips experienced in early March – when many investors redeemed mutual funds, pushing down the indices – have been erased. The fact that these new peaks have been achieved on increasing volumes of trade suggests local investors remain confident that continued regulatory change will boost the market.
We're not sure exactly what has been responsible for the delayed return of IPOs; the Chinese New Year holidays passed smoothly enough and everyone had time to get back to work following two weeks of relatives and baijiu – a combination sufficient to put anyone off a reform program. Seriously though, risk aversion – the feeling that this revitalization of the market absolutely must succeed – is surely one cause.
The serious illness and hospitalization of vice-premier and financial markets tsar Huang Ju in January has no doubt also added its share of complications to the political maneuverings associated with renewed IPOs. But in the end, it may turn out that the regulator was just sitting on its hands, biding time until the 2005 annual results were published. This enables new IPOs or secondary listings of A-shares to be selected using most recent data.
It's not that the regulator doesn't have plenty of other things to do. Already listed companies must still be supervised and the regulation of China's fixed income markets remains a work in progress. In addition, the rapid advent of commercial paper poses new challenges in the ratings business. With ratings now on the WTO agenda, there is an increasingly loud knocking at the gate from foreign ratings companies, so regulators can expect a busy spring and a long hot summer.
Not surprisingly, in the cautiously positive environment, our stock picks have all risen over the past month. We believe the bank stocks still have more upside as positive 2005 earnings from China Construction Bank 939 HK will buoy interest in the sector. In addition, Bank of Communications 3328 HK has yet to report earnings and Bank of China and ICBC are waiting in the wings.
On a price-to-book basis both Huaxia Bank 600015 CH and Minsheng Bank 600016 CH still lag their Hong Kong listed peers. This leaves a valuation gap which we expect will close as investors see the advantages of owning smaller, well-run banks with at least as strong a China focus as the Big Four. Accordingly, we still look for upside in these two stocks in spite of recent dips in the share price.
On the agriculture front, Gansu Mogao 600543 CH has had a good month, finishing above its 200 day moving average on above average trading value. Although the share price exhibits some volatility it remains well below its six-month high of RMB5.43 set last October, indicating to us good upside potential in spite of a triple-digit price to earnings ratio. Our companion agriculture stock, Xinjiang Guannong 600251 CH, has also finished above its 200 day moving average and remains well below its high of RMB6.17, also set last fall. It's P/E of 70 times is comparatively sane.
While our basic stock picks have proven profitable it makes sense to prepare for possible new listings by shifting some funds out of the less liquid agriculture plays and into the more liquid bank stocks. Therefore we'll sell 200 shares of Gansu Mogao but hold off on Xinjiang Guannong, which is locked up for share reform. Share prices tend to drop immediately after share-reform announcements, so we will revisit Xinjiang Guannong next month.
The cash from selling Gansu Mogao will be used to purchase equal additional shares of the two banks, which can be converted on shorter notice into cash to participate in future IPOs.