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Unlocked stock may choke market rally

By Zhou Yan (China Daily)
Updated: 2009-07-31 08:00

People watch stock prices at a securities firm in Fuyang,Anhui province,yesterday. The benchmark index has surged by 12.2 percent so far this month.[China Daily]

The scheduled release of 31.7 billion non-tradable shares of 84 publicly traded companies in the Chinese stock market, valued at about 335.5 billion yuan at current market price, could deepen the correction to the rally which sent the benchmark indicator up over 80 percent since the beginning of the year.

Although the amount of non-tradable stocks that will be unlocked next month is 67.9 percent smaller in value compared to the 1.05-trillion yuan worth of newly unlocked shares in July -- the highest so far this year -- it still accounts for 2.83 percent of the total market capitalization.

After the unlocking, the entire share capital of 47 enterprises out of the 84 can be traded freely on the stock exchanges.

Daqin Railway Co, operator of China's largest coal transport line, is scheduled to unlock 9.5 billion of non-tradable shares worth 108.1 billion yuan on August 3, the largest in August, followed by Air China Ltd, the nation's largest international carrier, which will release 6.2 billion shares worth 566.7 billion yuan mid-August.

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"In the second half, when the stock market will see more corrections, the impact of this flood of unlocked shares on the market will be more significant," said Zhong Hua, an analyst at Changjiang Securities, adding that it would however not determine the market trend.

The benchmark index has surged by 12.2 percent so far this month. Along with the rally, the selling spree of unlocked non-tradable shares, with 97 listed companies announcing to sell these stocks worth 12.7 billion yuan, is imminent.

Analysts said shareholders' willingness to sell non-tradable shares has been ballooning since May. Figures from China Securities Depository and Clearing Co reveal that 9.8 percent of released non-tradable shares were sold in June, up from May's 4.2 percent.

"During a time when the market is in growth trajectory, stocks with non-tradable shares to be unlocked outperformed those without such shares," said Wang Mingli, a statistics researcher from TX Investment Consulting Co based in Shanghai.

According to Wang, during June to early November 2008, the price of stocks with new non-tradable to-be-released shares declined 1.7 percent further than the drop in their respective sectors. "Therefore, holders of the released non-tradable share are more likely to hold during a weak market," Wang said.

In comparison, from last November to February 2009, when the market witnessed a turnaround, these stocks gained 0.72 percent more than its industry peers.

Still, the impact of the new scrips' flood was not huge given the proportion of such shares' capitalization in the overall market value (around 0. 21 percent to 0.38 percent).

But Wang cautioned that its influence would get bigger when the market starts to fluctuate, which was very likely to happen over the rest of the year.

Changjiang's Zhong estimated that the major gauge would swing between 2200 and 2400 points in this year's remaining months.