Stocks News
- Firms urged to rely less on stock gains
Date: 30-Aug-2007 Sources: (Shenzhen Daily)
COMPANIES are too dependent on investment gains from the stock market, threatening earnings growth in the longer term, an official with the nation's securities regulator said yesterday.
About 12 percent of corporate profits were derived from stock market windfalls in the first quarter and the ratio may be surging, Qi Bin, head of the research department at the China Securities Regulatory Commission (CSRC), said.
'If a lot of companies are focused on stock speculation rather than their core businesses, long-run earnings and business growth will be hurt and so will the stock market,'' Qi said.
Per-share earnings at companies are growing at about half the pace officially reported after stripping out gains from investments, according to Morgan Stanley. The CSRC is trying to educate companies about the risks of punting on a stock market that's quadrupled in the past year, Qi said.
The benchmark CSI 300 Index closed at records in each of the past seven trading days and has defied a global rout triggered by the fallout from the U.S. subprime mortgage crisis. Domestic investors have opened 33 million trading accounts this year, six times the total for 2006.
First-half corporate earnings in companies jumped 76 percent on a per-share basis, Morgan Stanley strategist Jerry Lou wrote in a report dated yesterday. When leaving out investment windfalls and other non-operational activities, that figure drops to 41 percent, he said.
'It's a fine, subtle line to tread,'' said Qi. 'Companies need to know the risks involved in stock speculation, but we also want to take a market-oriented approach and let boards make their own investment decisions.''
Spurring enthusiasm among investors for stocks, inflation has outpaced returns on bank deposits, causing individuals and companies to shift some of their US$3.9 trillion in savings into equities. Consumer prices rose 5.6 percent last month, compared with the 3.6 percent benchmark deposit rate.
The rally has made A shares traded in Shanghai and Shenzhen the most expensive among world benchmarks, as measured by price-to-earnings ratios. The government, concerned about a stock market bubble, has increased taxes on share trades and is allowing more money to flow into overseas equities.
The stock boom has also made the nation home to some of the world's largest companies by market value. Industrial & Commercial Bank of China Ltd., which went public in October, is now the third-most valuable company, behind Exxon Mobil Corp. and General Electric Co.
Companies on China's benchmark CSI 300 Index trade at an average 52 times reported earnings, compared with 17 times for the Standard & Poor's 500 Index.
Restrictions on investing overseas, a clampdown on property speculation, and low interest rates have left mainland investors with few options except for domestic stocks. The government is gradually giving fund managers, banks and insurers more access to foreign markets.
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