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 Bans Time-Limited Sales Promotions

China's Ministry of Commerce issued an urgent circular on Monday banning time-limited sales promotions in shops following a deadly stampede at a Carrefour outlet.

Three people died and 31 were injured in a stampede triggered by a sales promotion at a Carrefour outlet on Nov. 10 in the country's southwestern Chongqing Municipality.

The three-day promotion at a hypermarket in the city's Shapingba District was launched to celebrate the 10th anniversary of the French retail giant's entry into the city.

The shop offered an 11.5 yuan (1.5 U.S. dollars) savings from the original price of 51.4 yuan for a five-liter bottle of edible oil. When it opened its doors for business throngs of people swarmed in and a mass stampede began.

"The outlet has been ordered to suspend operation and the work safety watchdog has started an investigation," said Gao Chang, spokesman for the Shapingba District government.

The ministry has ordered local commercial authorities and public security departments to launch an overhaul of retail stores to prevent similar incidents from happening again.

It also ordered local branches to help store managers foster safety awareness and establish emergency-response procedures.

China Banking and Insurance Introduction

After the founding of the PRC, the People’s Bank of China exercised the functions and powers of the central bank, at the same time handling industrial and commercial loans and savings. Therefore, it was neither a real central bank nor a commercial bank in conformity with the laws of the market. Since 1978, China has carried out a series of major reforms in its banking system and invigorated the opening to the outside world, in the process allowing finance to develop steadily. In 1999, the total amount of RMB deposits of all the banking institutions had reached 10.9 trillion yuan, and the total amount of credits was 9.4 trillion yuan, 96 times and 53 times the figures for 1978, respectively. China has basically formed a new financial system regulated, controlled and supervised by the central bank, with national banks providing the main body, and policy management separated from commercial business. Many different kinds of banking organizations coexist, rationally coordinating the division of responsibility. The new banking system has played an active role in curbing inflation and promoting economic development. Since 1984, the People’s Bank of China no longer handles loans and savings, but formally acts as a central bank to exercise macro-control and supervision over the nation’s banking business, achieving remarkable success. In 1994, the Industrial and Commercil Bank of China, Bank of China, Agricultural Bank of China and Construction Bank of China were transformed into national commercial banks; meanwhile, three policy banks were established: the China Agricultural Development Bank, National Development Bank and China Import and Export Bank. The Commercial Banks Law, issued in 1995, not only provides the conditions for constructing a new commercial bank system and organization, but also offers legal ways for the national specialized banks to be transformed into commercial banks. Since 1996, a number of stock commercial banks have been set up, the number of financial institutions have increased rapidly, and banking businesses have become diversified, and banking services have become an indispensable part of society. After the eruption of the financial crisis in the capitalist countries of Asia in 1997, in order to prevent and eliminate financial risks, the People’s Bank of China established a management system in 1998 to conduct independent management and supervision over the banking, securities and insurance sectors, cancelled provincial-level branches and offices at or below the prefecture and city levels, and established nine trans-provincial (autonomous regional and municipal) branches.

Over the past 21 years, China has steadily broadened its finance sector. A group of foreign-capital and Sino-foreign joint-venture financial organizations have been established in the special economic zones and coastal open cities as well as in major inland cities, and the right to do RMB business has been given to some foreign-invested banks. The Chinese government has decided to enlarge the regions where foreign-invested banks may establish business operation organizations from the present 23 cities and Hainan Province to all major cities. By the end of 1999, a total of 177 commercial foreign financial organizations and 248 agencies of foreign banks had been set up in China. China’s commercial banks have also set up branches abroad to develop international credit business. Among them, the Bank of China has the most and biggest branches. In 1980, China resumed its membership of the World Bank, and returned to the International Monetary Fund. In 1984, it established business relations with the Bank for International Settlements. In 1985, China formally joined the African Development Bank, and in 1986 officially became a member of the Asian Development Bank.