An Introduction to China’s Stock Market April 21, 2004 Ying Tan and Dan Gao

1. AnIntroduction to China’s Stock Market April 21, 2004 Ying Tan and Dan Gao

2. Profile of China Full Country Name: The People's Republic of ChinaArea: 9,600,000 sq kmPopulation: 1.24 billionCapital City:Beijing (pop 12 million)

3. Profile of China People: Han Chinese (93%), plus Mongolian, Zhuang, Manchu and Uighur ethnic groupsLanguage: Putonghua (Beijing dialect mandarin)Religion: Officially atheist; Confucianism, Buddhism, Taoism (no stats available); Muslim (14 million), Christian (7 million)

4. China’s GDP Growth

5. China’s Economic Forecast

6. Financial System

7. Exchange Rate Changes

8. Exchange Rate System • Market-based, single and managed floating exchange-rate system ----Convertibility of RMB current accounts ----Partially convertibility of RMB capital accounts

9. Financial Market • Money market: CHIBOR • Capital market: bond market stock market

10. China’s Stock Market (outline) • Why shall we know the market • Brief history • Share category and market structure • A-share market (feature, investors) • B-share market • Overseas share issuance • Problems • Market today

11. Why shall we know the market? • The 8th largest stock market in the world with market capitalization of $750bln. • A fast growing market • Great opportunity (World Expo and Olympics) • Career opportunity (QFII, WTO) • Friendship

12. Market Trend (1990-present)

13. Brief History • Started in Dec 1990 with only 8 listed stocks • Stock market fever 1992-93 • Dull years, 94-95: the creation of non-tradable shares and quota system. • A promising but false start: 96-97 • Growth with CSRC in charge, 1998-2002

14. Share Categories • Non-tradable shares a. Legal person shares b. State-shares • Tradable shares a. A-shares: denominated in RMB (1264) b. B-shares: denominated in US$ and HK$ (53,57) c. H-shares: PRC-registered listed in HK d. Red-chips: Chinese companies registered overseas and listed abroad

15. Features of A-share market • High P/E ratio (40 times) • Still a supplementary sources of funding (100bln) • Still dominated by government’s intervention

16. Investors on A-share market • Individual investors (20m-40m vs 1.3bln): used to dominate the market (S/T speculation I/O L/T professionally managed investment). • Institutional investors: securities companies(100) , trust and investment companies, investment funds (20, 10%,80%), insurance companies, assets management companies.

17. B-share market • Started in 1991 as a category of shares exclusively for foreign investors. In early 2001, Chinese individuals with forex accounts were allowed to buy B-shares. • By the end of 2003, 112 firms had issued B-shares and raised RMB38.2bln of funds only. • Same shares with different prices and rights. • It moves with A-share markets and is very illiquid.

18. Overseas Share Issuance • By the end of 2002, 75 PRC-registered companies had listed shares in HK (H-shares), NY and London, raising $20.4BLN. • Nearly 60 red-chips are listed in HK. • By mid 2002, 31 mainland companies and 9 HK red chips had issued ADRs in US with 14 listed on NYSE.

19. Problems • Poor regulation • Poor accounting and auditing system • How to deal with the non-tradable shares?

20. A-share market in 2004 • A bullish market • Reason: • Expected 8.5% GDP growth in 2004 • SOE saw good performance in 2003 • Int’l investment banks increase their holding of Chinese-concept shares • Negative real interest rate • Expectation of RMB appreciation, large foreign capital inflow

21. Chinese Stock Miracles • One fourth of Chinese stocks listed in NY exchange appreciated by 100% • Chinese Enterprise index in HK exchange rose up to 5000 from 2000 early in 2003 • Sina, Sohu and Netease stocks rose twentyfold in NY exchange • Buffett is the major shareholder of PetroChina

22. H Shares ! HSI—Hang Seng Index 33 HSCEI—Hang Seng Chinese Enterprises Index

23. Beat the market! • Chinese Stocks in NASDAQ

24. Why do the prices of Chinese stocks skyrocket? • Direct factors: • Many large investment institutions and banks flock to purchase Chinese stocks; • Most of Chinese listed companies have relatively high EPS; • Individual investors are bullish on the stocks only because they are from China Mainland.

25. Why do the prices of Chinese stocks skyrocket? • Indirect factors: • The prospect of the constant 7% economic growth in China; • China has caught the eyes of the world; • Beijing’s 2008 Olympic Games and Shanghai’s 2010 World Expo; • The satisfying learning-by-doing performance of Chinese government in terms of economic development;

26. Sagas of listed Chinese companies • BYD Co. Ltd. - H Shares

27. BYD Co. Ltd. - H Shares Financial indicators (ended 31/12/2002) EPS RMB0.9333 Net asset RMB2,571,417,000 Net Profit RMB 658,303,000 P/E ratio 27.00 Market Capitalization: US$ 1 billion • BYD COMPANY LIMITED was founded on February, 1995, specializing in research, manufacture and sales of rechargeable batteries.Its main products include Lithium-ion batteries , Nickel-Cadmium batteries and Nickel-Metal hydride batteries. BYD moved to the new industrial park in September of 2000, which locates in ShenZhen, China. It covers an area of 374,000 square meters, and over 15 thousand employees work there.

28. Dotcom companies in NASDAQ Exchange

29. Sina.com & movie star I wanna buy Sina stock at$2! I will sell Sina at $45! Ziyi Zhang Daolin Mao

30. A bullish market?Stock bubble?Or foolish investment?