China using big equity offers to cool market

SHANGHAI, Jan 21 (Reuters) - The announcements of three big equity offers in China, including a monster $20 billion cash call by the country's second biggest life insurer, may signal a new determination by the government to cool the stock market.
News of the offers, as well as tumbling share prices in Hong Kong and other global markets, sent China's main stock index plunging 5.1 percent to a one-month low on Monday.
The main trigger was Ping An Insurance (Group) Co, which said at the weekend that it would sell as many as 1.2 billion new local shares and up to 41.2 billion yuan ($5.7 billion) of convertible bonds with warrants.
Based on Ping An's closing stock price of 88.39 yuan on Monday, the sale could in total raise almost 150 billion yuan -- by far the largest equity financing in China's domestic market.
"The government has found the weapon to cool the market -- supply," said Ren Chengde, senior analyst at Galaxy Securities.
"It may not hope the stock market will fall so much that it becomes undervalued. But it does want to squeeze out the part of the stock bubble caused by China's excess liquidity."
The Shanghai market almost doubled in 2007 after rising about 130 percent the previous year.
The government's desire to cool the market may be fuelled by signs that consumer price inflation is not coming down as fast as hoped from November's 11-year high of 6.9 percent.
Official sources said December inflation, expected to be formally revealed this week, was 6.5 percent. But rising food prices have many analysts predicting a new high in January.
The government showed its alarm last week by placing price curbs on a range of basic foods, its heaviest such intervention in over a decade. While food is the main source of inflation, officials have said surging asset prices may be contributing.
When it felt the stock market's bull run was getting out of hand in May last year, the government hiked the trading tax. But that was met by a public outcry as the market fell 20 percent in a week, exposing the government to accusations that it was hurting small investors.
By using fresh supplies of shares instead of direct administrative measures, authorities can claim they're following market principles and helping build Chinese companies.
CONSTERNATION
Ping An's announcement was met by consternation in the markets. Previously, China's largest domestic equity sale was the 66.8 billion yuan raised by oil giant PetroChina in its Shanghai initial public offer last October.
Ping An said it would use the money as capital and for acquisitions compatible with its core business. It did not elaborate.
"I don't understand what sort of big acquisitions Ping An needs so much money for," said money market analyst Duan Yunfei at Merchants Bank, a major Chinese bank.
"The domestic equity market cannot easily cope with such a huge fund-raising, and the money market doesn't have enough money to cope with it given the slew of other large offers."
Also at the weekend, China Coal Energy Co, the country's second-biggest coal producer, said it was launching an IPO in Shanghai worth up to $4.5 billion, which would make it China's 10th biggest.
And the securities regulator said it would consider on Wednesday a proposal for a Shanghai IPO by China Railway Construction Corp, one of the biggest construction firms. That could mean another cash call of about $3 billion in Shanghai.
Most analysts do not believe the government is actively pressuring the state-run companies into issuing equity. But it can easily create periods of heavy new share supply by adjusting the timing of regulatory approvals for new issues.
One theory is that firms are rushing to raise funds now since they fear the stock market will slow later this year, as Chinese monetary policy tightens further and the U.S. economy possibly enters recession. If so, regulators seem happy to allow the rush.
"I don't think the government is directly behind these share issues. But it's clear that regulators are no longer trying to limit the supply," said Zheng Weigang at Shanghai Securities.
The timing and mechanics of Ping An's sale are unclear. It described the sale as an "offer", not a private placement which might have have less impact on markets, but analysts think the sale may be adjusted if necessary to limit the impact.
Analysts said the offers by China Coal and China Railway were still likely to attract strong demand, since domestic Chinese IPOs are typically priced attractively to ensure that the stocks enjoy strong debuts.
But Ping An is likely to meet poor demand if it tries to sell as many shares as its announcement suggested, analysts said. Its Shanghai shares plunged their 10 percent daily limit on Monday.
"We're not sure of the regulatory situation behind this slew of major offers, in particular Ping An's record fund-raising," said a senior trader at Guotai Junan Securities.
"But we question the wisdom if authorities want to push share prices down in this way. If investor confidence is destroyed, the market will fall even more than it did in May last year." ($1 = 7.24 yuan) (Editing by Andrew Torchia & Lincoln Feast)

China Insurers Lag Hang Seng on Concerns Stock Gains Will Fall

Jan. 22 (Bloomberg) -- China Life Insurance Co. and Ping An Insurance (Group) Co. paced declines in the shares of Chinese insurance companies today on concern that a decline in the value of their stock investments will hurt earnings.

China Life, the nation's biggest insurer, headed for a seven-month low, dropping 15 percent to HK$28 in Hong Kong trading at the 12:30 p.m. lunch break. Ping An, China's second largest, trimmed 12 percent to HK$60. The Hang Seng lost 8 percent, headed for its biggest two-day slump in a decade. China's benchmark CSI 300 Index fell 6 percent as of 1:30 p.m., headed for its biggest two-day decline in almost eight months.

``Investors are concerned that the rout will eat into earnings for Chinese insurers,'' said Liu Yang, who helps manage $4 billion as managing director of Atlantis Investment Management Ltd. in Hong Kong. ``If the stock markets continue to fall, their balance sheets will start hurting in about six months.''

Profits at domestic insurers have been powered by China's surging stock market, the world's best performer last year. Shenzhen-based Ping An depends on investment gains from stocks and bonds for about 30 percent of revenue.

Twenty insurers, including China Life, Ping An and PICC Property & Casualty Co., the nation's largest property insurer, received licenses to invest overseas, mostly in the Hong Kong market, the industry watchdog said on Nov. 30.

PICC tumbled 20 percent to HK$7.18 on the Hong Kong bourse, on course for its biggest fall since the shares started trading in November 2003.

Share Sale

Investors are also concerned that Ping An's plan to issue as many as 1.2 billion new shares in Shanghai will dilute shareholder value, according to fund managers.

Ping An has lost 74.7 billion yuan ($10.3 billion) in market value since the Jan. 18 close on the Shanghai bourse, when it announced the planned share sale. The insurer is seeking to replenish capital after investing 1.81 billion euros ($2.6 billion) in Fortis, Belgium's biggest financial company, to become its largest shareholder.

``Shares are tanking because investors are worried about dilution,'' said Lu Yizhen, who oversees the equivalent of $1.3 billion at Citic-Prudential Fund Management Co. in Shanghai. ``For Ping An it looked like a good time to sell shares because prices were so high. But the whole market's down right now, and funds and other institutional investors have little appetite.''

Ping An could raise 106 billion yuan, based on yesterday's closing price. The final price will be set at no lower than the average closing price of Ping An's Shanghai-listed shares in the 20 trading days prior to the listing document's publication or on the day immediately prior, the statement said.

Third-quarter profit more than quadrupled at Ping An, part- owned by HSBC Holdings Plc, as the insurer booked investment income of 17 billion yuan in the period.

China Life, based in Beijing, pulled in investment income of 20 billion yuan in the three months ended Sept. 30.

China's Main Stock Index Falls 7.2 Pct

SHANGHAI, China - Chinese stocks plunged Tuesday, with the benchmark Shanghai Composite Index falling 7.2 percent to its lowest close since early August amid the second straight day of global declines.

The drop, and the losses in many major markets, reflected growing fears of a sell-off on Wall Street once markets reopen in the U.S. following a public holiday on Monday, analysts said.

The Shanghai Composite index lost 354.69 points to 4,559.75, its lowest close since Aug. 2, when it ended at 4,407.73. The Shenzhen Composite Index of China's second, smaller exchange fell 7.7 percent to 1,337.24.

Trading was volatile, with the Shanghai index falling sharply in the morning, recovering some lost ground by midday, and then plunging again by more than 8 percent in the afternoon.

"Panicky investors are selling now because they're afraid China's stock markets will tumble further tomorrow following the U.S.'s expected overnight losses," said Zhang Yidong, an analyst at Industrial Securities.

Across the region, Japan's benchmark Nikkei index plunged 5.7 percent to its lowest close in more than two years, while Hong Kong's Hang Seng Index was down 8.8 percent by late afternoon.

Share prices fell sharply Monday in Asia and Europe following Wall Street's declines last week amid pessimism over a U.S. government plan to prevent a recession.

China's yuan-denominated "A shares" are generally off-limits to foreign investors, and other restrictions have tended to isolate the mainland Chinese markets from global trends.

But the recent uncertainty over the global economic outlook and reports that Chinese banks may be facing significant losses from their exposure to the U.S. mortgage crisis have rattled local investors.

"The sharp decline actually shows China's rising position in world financial markets," said Peng Yunliang, a senior analyst at Shanghai Securities.

"China cannot be isolated from international markets since its economy is now closely linked to the rest of the world," he said.

The Shanghai benchmark has fallen 13 percent since the beginning of the year, after nearly doubling in 2007.

Banks and other financial companies led declines. Industrial & Commercial Bank fell by 8.5 percent to 6.92 yuan; Ping An Insurance fell by the 10 percent daily limit to 79.55 yuan and market heavyweight PetroChina slipped 4.7 percent to 26.18.

Flag carrier Air China fell by the 10 percent daily limit to 24.73 yuan amid signs that smaller rival China Eastern Airlines is rebuffing a tie-up with Air China's parent company. China Eastern also fell by the 10 percent limit Tuesday, to 17.47 yuan.

In currency dealings, the dollar was at 7.2362 yuan around 0730 GMT on the over-the-counter market, down slightly from Monday's close of 7.2365.