China's Other Exchange Reaches For The Spotlight

Lodged in the three-story Grand Theater building that also houses a concert hall, movie theater, and karaoke joint, the Shenzhen Stock Exchange is easy to miss. But appearances are deceiving, insists exchange President Xia Bin. Having suffered through a nine-month downturn that brought trading to a near-standstill this spring after prices plunged 40%, China's No.2 bourse is starting to recover. Says Xia: "We've come back."

And quite smartly, at that. Daily volume in "B" shares, the class of stock available to foreign investors, has increased fivefold in just three months. Since June, the exchange's index of B shares has jumped 15% (chart). Activity in "A" shares traded by locals is picking up as well. Expectations that the central bank will ease credit is helping the market get on the road to recovery. But so is a spate of new listings from companies across China that are luring foreign investors away from Shenzhen's bigger and more glamorous rival to the north, Shanghai.

Shenzhen's rebound is an indicator of the changes afoot as China attempts to clean up its troubled capital markets. After a year-long policy deadlock in Beijing, proponents of controlled growth of new listings have won out over advocates of rapid expansion at any cost. As a result, supervision of exchanges is increasingly being placed under the control of the China Securities Regulatory Commission (CSRC), an arm of the government in Beijing.

CLOSE THE GAP. The shift means that local companies, many of them property developers with shaky fundamentals but good connections to market officials, are making way for better-managed companies on Shenzhen's bourse. Since Beijing ended a ban on new listings of B shares earlier this year, Shenzhen has offered half a dozen new listings. They include Sichuan-based motorcycle maker Shenzhen North Jianshe Motorcycle, Wuxi Weifu, a manufacturer of fuel-injection equipment based in Jiangsu province, and Jiangling Motors, a truckmaker from Jiangxi, in which Ford Motor Co. plans to purchase a 20% stake.

The bid to go national by upstart Shenzhen, which is situated in a special economic zone developed over the past two decades, is aimed at narrowing the gap with the market in Shanghai, China's historic financial and industrial center. With a large number of local companies eager to float stock, the Shanghai market has made it difficult for companies from outside the city to gain listings. "Officials there give priority to their own enterprises," complains Ann Shih, head of China research for W.I. Carr (Far East) Ltd. in Hong Kong.

That doesn't sit well with Beijing, where the CSRC's new chief, Zhou Daojiong, who was appointed last spring, is determined to set the agenda for both exchanges. Some analysts wonder if Zhou will replace Shenzhen market chief Xia so he can have his own man in charge. But Zhou is also likely to purge Shanghai exchange officials. They angered regulators by protecting big local traders during a bond-futures scandal last February that nearly toppled the city's leading broker, Shanghai International Securities.

NOT CONCERNED. Shanghai's regulatory shortfall provided an opening for Shenzhen. But Shenzhen still has to overcome a few deficits. Since so many foreigners thought Shenzhen was dead in the water, stocks have been cheaper than in Shanghai. That difference persists even with Shenzhen's listing blitz. For instance, Jianshe Motorcycle started trading in July at 6.8 times earnings, about half that of Shanghai-based rival Ek Chor China Motorcycle. And with Shanghai remaining as the headquarters for many Chinese and overseas banks and insurers, there are some investors who doubt that Shenzhen can sustain its brand new momentum.

But for now, Xia says, he is not concerned--about officials in Beijing or Shanghai. "China is so big," he says. "The south can have a financial center, too." There may be more daytime drama in store at Shenzhen's Grand Theater yet.

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