Empirical Analysis on Chinese Stock Market and Real Estate Stock

7/28/2019 Empirical Analysis on Chinese Stock Market and Real Estate Stock

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AsRES paper for annual conference 2002

Empirical analysis on Chinese stock market and Real estate stock market operation features

by

Zhenming Ge

Tongji universityJune 2002

1. Introduction

With the deeper economic system reform, improving the low capital efficiency in the state-owned

enterprises has become one of the key economy pushing factors. Since 1980, some state-owned

enterprises, on the authority of issuing stocks from the government, have begun to infuse capital

through publicly offering in Guangdong , Shanghai and Shenzhen. Aiming at support the form the

formal investment environment, Shanghai Security Exchange and Shenzhen Security Exchange

had launched respectively in Oct. 1990 and Jul. 1991. The central government issued the policy of

developing system of modern enterprise, requirements of which can be describe as clearly

established ownership, well defined power and responsibility, separation of enterprise from

administration, and scientific management. This system, in fact originated 200 years ago, once

prevailed in Shanghai as early as 1900s and banned by the government in 1950s, now have begun

to boom .

Since issuing stock is playing important role in the development of the national economy

and the corporate expansion (especially the state-owned enterprises), the stock market comes to

thrive within only ten years, become the major reform that affect the current and future economy

of China. It is particularly true that China economic system reform , much differ from EastEuropean countries such as Russia and Czech, adopts another way and measures and leads the

Socialism market economy with distinct Chinese characteristics. Newly established stock market

which ,of cause, all this features.

With the quick booming of Chinese stock market, real estate investment, as the capital

intensive enterprises, also sees a great development and many RE companies listed. But it is also

true that some potential crisis become more and more evident , following the RE market

expansion. The major cause of this may due to the long time government rigid control which

leads the inefficiency of the market. This paper uses the data of SRESI and SCSI to empirically

analysis the correlation of relevant factors that influence the Shanghai RE index. We found that

the correlations are unexpectedly small.

The paper is organized as follows: I describe some basic features of Chinese stock market

and Chinese RE stock market .Next I use the correlation analysis in order to find some key factors

that can show the relationship between RE sector and RE stock market. But the result seemed

disappointing that we can no t find correlative factors. Finally I present and draw some

conclusions.

2. Basic features of Chinese stock market

1) Collecting capital plan is strictly controlled by the governmentThe amount of issuing stock is determined by the central government and distribute to the local

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authorities according to different department and regions. If allocated a chance to issue stock ,

local government actually got a legal authority of fund-raising.

2) The newly established share-holding company is actually the same wine bottle as before

despite the wine in it has changed.

In state-owned enterprises, government is still the big share-holder and the key management staffis directly appointed by certain committee but nobody will responsible for the money-loss of the

enterprises.

By Apr.2001 , in about 890 listed company, accounting for 79.2% total number of the listed

company, the big share holder control more than half of the company share, among them

government account for 65% and corporate legal entities (state-owned corporate)31%, adding to

96% of the total.

3) Issue price is also under administration

The price can be count by the requirements from officially expressed document Several fixed

notices of work about the issuance of stocks and the calculating formula below:

Issue price of the new stock=arithmetic mean of the after tax profit during past three

years*expected price-earnings ratio(P/E R or P/E multiple)

In the document it is defined that the default P/E R should be 15, this is not identical with the truly

Chinese enterprises performance and has a big disparity with the secondary market price. This

result in the lower issue price , and with the price rocketing, share subscriber is no less than a

lottery winner.

4) Weak management and changeable policy lead the mess of the stock market

Under the direct administration of the government, Chinese stock market, in fact, in the run of

traditional planning model, a series of relevant regulations and policies help the government with

achieving the plan. It not only expands the capital sources of the state-owned enterprises but

stabilizes the market .However, this kind of management breaks away the reality, violates the

basic market rules and ignores existence of the objective law, the outcome may be worse than it

should be.

3. Current situation of Chinese stock market

1) fast upgrowth of the market , sharply increasing quantity but small scale of list companies.

Table 1 demonstrates that quantity of list company has increased almost 100 times and the market

value enhanced 400 times. It is undoubtedly a very high speed. But the market is relatively small

as a whole, table 2 shows the securitized rate according to the total value of the stock market.

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securitizationrate=total stock market value/current GDP

table 1: Chinese stock market development

year listed

company

listed

stock

quantity

total stock

value(100million)

turnover(100million)

1990 10 10

1991 14 14 109.19 681.24

1992 53 71 1048.58 3667.03

1993 183 218 3540.52 8127.63

1994 291 345 3690.62 4396

1995 323 381 3474.7 21331.16

1996 530 599 9842.37 30720.26

1997 745 821 17529.24 30772

1998 851 931 19506 23544

1999 949 1029 26471 31320

2000 1088 1121 48091 60872

2001 1154 43523 40867

resource: Chinese security and futures statistical yearbook

table 2: securitization rate of China stock market

year 1995 1996 1997 1998 1999 2000 2001

SR 6.04 14.72 24.0 25.5 32.26 53.79 47.42

Resource: Chinese statistic year book 2001 and relevant materials

About 68% of the total market value, controlled by the state or state-owned corporate legal entity,

can not circulate, so the circulating stock value is relatively smaller than expected. Securitization rate listed in the table 2 do not reflect the real securitization. If counted by actual circulating stock

value, the securitization level is rather low.

Table 3: securitization rate in some countries

C&R Indonesia Germa

ny

Korea

S.

Japa

n

Philippi

ne

US UK Singapo

re

HK Chin

a

SR 23 24 42 71 74 83 122 240 35

2

16

Note: the cited rates, except China(in 2001), are the rate in 1993

Resource: Shanghai investment 2002 .4

2) The stock market structure is complex and the same stock may have different price at same

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time.

The issue stock of a company may be divided as circulating stock and non- circulating ones and

the circulating stock include A-share(for RMB),B-share(for US dollar and HK dollar available in

domestic area)and H-share(for foreign capital ).Non-circulating stock include the state-holding

share (state asset)and legal entity share(corporate asset) .

Table 4: stock holding structure at end of 2000(unit: 100 millions)

0

500

1000

1500

2000

2500

state-

owned

l egal

enti ty

staf f demosti c

common

stock

demost i c

f orei gn

stock

aboard

f orei gn

stock

1

Nowadays state-holding share and legal entity share account for about 67.8% and can not be

traded.

A-share, B-share and H-share have different price, sometimes the price disparity is very big. For

example, B-share price only reach 60%-70% of the A-share and H-shares is 10%-15%.3) The stock price seems independent of the performance of the company. The listed company runs

more and more unsatisfactory.

According to the research paper from Haitong security , list companies performance have kept

move downwards since 1992, mean of earning per share(EPS) dropped from 0.419 to 0.174 while

the Return on net assets slipped down from 19.733% to 5.295%, decrease by 58.5 % and 73.2%

respectively during past ten years.

It can be clearly argue that the business performance and money-loss of the listed company do not

change better after issue the stock. On the contrary, with the more competitive environment by the

entering of private enterprises, the downtrend performance occurred in state-owned listed

company seems inevitable.

Despite the poor business operation of the listed company, its price, however, still keep rising and

have no sign of downward. According to current interest rate, the average P/E multiple should be

20, but in fact , the P/E multiple always go beyond 100. Official statistics show that the listed

company which P/E R above 100 account for 11.6% and 7.4% respectively in Shanghai security

exchange and Shenzhen security exchange.

4) Imperfect legal system and weak supervision leads the serious Swindle behavior in market.

Getting the authority of issue amount and issuing additional stock makes the company collect the

capital in lowest cost, so it incurs the drastic illegal competition among all local government and

listed companies. Especially some state-support investment institutions, do not function as thestable factors in market but utilize the capital to obtain the huge profits (depend on expanding fake

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information to mislead the market).

Despite of the rapid growth of the Chinese stock market, many potential dangerous problem

need to be properly settled. The current urgent task in reforming the stock market is to improve the

business environment and corporate governance structure in mechanism.

4. Features of the Chinese real estate stock market

1 introduction

In the 90s ,at the very first stage of the Chinese stock market development, the real estate

investment enterprises has quickly come to booming and shriving. Some large real estate

companies have began to enter the capital market through public offering since when the national

investment stock has not formed. By 1993, listed real estate investment companies had accounted

for about 10% of the total. Meanwhile, with the support a succession of government policies,

especially after the Deng Xiaoping's south inspection tour speech (a very important speech

disclaims the government determination to reform and open outside), the real estate demand

rapidly increased and the supply lagged behind. Inadequate supply made the unexpected high

profit to the real estate market and attracted more and more insane investor involve in it. It is very

clear that the supply drastically increase out of control and go beyond the demand. The bubble had

broke, following it the land left unused , house is idle and listed real estate performance become

worse quickly. According to the situation, the government enforce the management by stopping

authorizing real estate company issuing the stock and RE stock never be the desirable prey of the

capital.

Picture 1 demonstrates Shanghai composite index and other major economic index changes. From

the picture , it is very clear to see that index of RE stock move ahead simultaneously with other

major index but it still be in a relative low level.Picture 1

Oct -

96

J an-

97

Apr-

97

J ul -

97

Oct -

97

J an-

98

Apr-

98

J ul -

98

Oct -

98

J an-

99

Apr-

99

J ul -

99

Oct -

99

J an-

00

Apr-

00

J ul -

00

Oct -

00

0

50

100

150

200

250

i ndex of SSE i ndust ry i ndex real est at e i ndex

bussi ness i ndex publ i c i ndex composi te i ndex

SSE: Shanghai Stock Exchange

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2Features of Chinese real estate stock market

As the common result of real estate market and stock market, RE stock is inevitably constrained

by the two market, and its change should have certain features.

1) The RE market stock is not in incongruity with the development of RE market.Since 90s, real estate investment has become the major pushing force of Chinese economy. In

sharp contrast with the quick booming investment amount, the listed RE investment companies, as

the important financing institution in real estate enterprises, still in very small scale.

Development of listed RE companies

Table 5.1

year 199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

1999 200

0

2001

total amount of listed companies(1) 14 53 163 291 323 530 745 851 849 103

3

1174

amount of listed RE companies(2) 2 9 20 26 27 34 35 35 35 36 41

(2)/(1) 14% 17% 11% 9% 8% 6% 5% 4% 3.5

%

3% 5.5%

Table 5.1 shows us the gradual decline of the market share of the RE listed companies. It is also

true that the RE developing scale and productivity rapidly increase at the same period. As

demonstrate in table 5.2 (take Shanghai as example) ratio of RE investment and the fixed assets

investment has raised from 2.9% to 30% , the highest ones among all enterprises. The production

also rise form 1.36% in 1991 to 5.5% in 2000. All these facts show us the huge capital demand in

RE development and great promote function of RE to national house building. This enterprise,

however, is faced with the situation of continuous shrink of the financing scale. Similar situation

occurred in Beijing and Shenzhen, the two of the biggest economic centers in China.

Economy and real estate growth in Shanghai

Table 5.2

year GDP

(100 millions)

RE value-

added

(100millions

)

REP/GDP Fixed assets

investment

(100millions)

RE

Investment

(100millions)

REI/FAI

1991 893.77 12.2 1.36% 258.3 7.59 2.90%

1992 1114.32 20.5 1.84% 357.38 12.71 3.60%

1993 1511.61 26.4 1.75% 653.91 22.04 3.40%

1994 1971.92 39.1 1.98% 1123.29 117.43 10.40%

1995 2462.57 91.43 3.71% 1601.79 466.2 43.90%

1996 2902.20 124.3 4.28% 1952.05 657.79 33.70%

1997 3360.21 147.5 4.27% 1977.59 614.23 31%

1998 3688.20 185.4 5.01% 1964.83 577.12 29.30%

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1999 4034.96 210.5 5.20% 1856.72 514.83 27.70%

2000 4551.15 251.7 5.51% 1869.67 566.17 30.20%

2001 4951.00 620.31

Some reason may be counted:

Although many listed RE investment companies have been stopped offering stock for the sake of

unsatisfactory performance, some local government still attempt to utilize the available land to

spur the local economy.

Main part of the capital investment for the RE project come from bank loan. Deposit and sale

fund in advance account for about 30%, self owned and financed capital account for 30%,and the

others bank loan. It is unnecessary to get capital in the stock market.

There are about 30000 RE investment company in China, merely in Shanghai 3000 companies,

much less listed companies and limited capital pool can not play a distinctive role in the RE

development.

2) Despite of the progressively recovery of the list RE companies on the whole, disparity and

fluctuation on of the performance is still evident.

Table 6 gives us the contrast between performance of RE companies and total stock market

performance. It earning ratio of the net assets and EPS changes in saddle-like curve , some

RE company stocks has become stable good performance stocks after six years down-up

process.Regional aspects and uniqueness of the project determined the disparity and fluctuation of

the performances and the following serious polarization, as table 7 showed

Table 6

Earning ratio of net assets of the RE companies

0%

5%

10%

15%

20%

25%

1994 1995 1996 1997 1998 1999 2000

RE compani es total l i sted compani es

EPS of the RE companies

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0. 00

0. 10

0. 20

0. 30

0. 40

0. 50

0. 60

1994 1995 1996 1997 1998 1999 2000

RE compani es total l i sted compani es

Relevant data of the listed RE companies in 2000

Profit

higher 20%

Profit

lower 20%

Amplitude

above 20%

Amplitude

lower 20%

major business income 17 11 28 59.57

major business profit 16 13 29 61.7

net profit 20 15 35 74.47

yield of net assets 12 20 32 68.09

EPS 16 17 33 70.21

All original resources come from Chinese year book and China Security News

3)Rearrangement of assets in the listed RE companies

Due to the feature of capital-intensive and fund operation on the base of project, listed RE

companies is , in some sense, more easier to proceed assets reorganization.

Because of the strict control from the government on the authority of offering stocks, the

listing authority has become important added value (we call it shell resources) for a company.

Some bad performing companies may be listed when borrow the shell from other

companies.

The forms of the reorganization may be various , such as transaction of the shell or optimize

the inside structure of the enterprises by assets-peel off , assets replacement and M&A.

Combine the characteristics of the stock market and listed company of the real estate,

regulating the structure through the rearrangement of assets and expanding the scope of the

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enterprise I thinkis an only road to improve enterprise's quality.

5. Correlation analysis of shanghai real estate stock with relevant factors

In normal market condition, any stock market should closely correlate with national and local

economy growth, development prospective of the industry, business performance of the

companies and peoples income and saving. Chinese high speed growth is based on the big scale

construction investment and RE enterprises plays a very important role in increasing demand and

pushing forward the economy. The main method of gathering capital for the RE investment

companies is to publicly offer stocks.

After analysis of operation characteristic of Chinese RE stock market, further empirical analysis of

relevant factors of RE stock market is needed. Take Shanghai stock market as research object.1) Correlations analysis of Shanghai composite index and RE stock index.

In order to reduce the disturbance of independent factors (such as fake news and policy regulation)

and objectively analysis, the drastic up and down of stock market during 1992 and 1995 is out of

the consideration. The correlation analysis data is taken the 1996 index as the base period and base

index is 100. The result of analysis of SCSI and SRESI is demonstrated in Figure 1 and Table 10.

To make the comparison between Shanghai index and HK index, the result is shown in Figure 2

and Table 11. Correlation of SRESI and SCSI is far less than the correlation of HK index.

Shanghai index of RE stock move ahead simultaneously with other major index but it still be in a

relative low level.

Table 9

year 96-

Oct.

97-

Jan.

97-

Mar.

97-Jul. 97-

Oct.

98-

Jan.

98-

Mar.

98-Jul. 98-

Oct.

99-

Jan.

99-

Mar.

SRESI 100 95.13 142.33 119.37 111.9 99.05 109.63 102.33 86.88 80.05 76.83

SCI 100 98.77 142.68 121.8 120.78 125.18 136.34 134.8 124.56 116.1

7

114.74

year 99-Jul. 99-

Oct.

00-

Jan.

00-

Mar.

00-Jul. 00-

Oct.

01-

Jan.

01-

Mar.

01-Jul. 01-

Oct.

2-Jan.

SRESI 113.12 97.72 101.59 114.13 127.46 112.86 134.95 135.43 134.31 116.7

4

98.25

SCI 163.87 154.04 157.11 187.92 207.16 200.72 211.49 216.97 196.61 172.9

4

152.72

SCI: Shanghai composite index

SRESI: Shanghai RE share index

Resource: Shanghai investment every year issues

Figure 2

9

The figure of index

0

200

400

600

800

1000

87-

Jan.

88-

Jul.

90-

Jan.

91-

Jul.

93-

Jan.

94-

Jul.

96-

Jan.

97-

Jul.

99-

Jan.

00-

Jul.

02-

Jan.

Year

Index

Hang Seng- Hangkngi Heng Seng Propert i tes-Pr i ce I ndex


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Table 10

The Correlation Matrix of Shanghai Real Estate Share Index and Shanghai Share

Complex Index

Matrix Shanghai Real Estate

Share Index

Shanghai Share

Complex Index

Shanghai Real Estate

Share Index

Pearson Correlation 1.000 .684**

Sig. (1-tailed) . .000

N 22 22

Shanghai Share

Complex Index

Pearson Correlation .684** 1.000

Sig. (1-tailed) .000 .

N 22 22

** Correlation is significant at the 0.01 level (1-tailed).

Table 11

The Correlation Matrix of Hang Seng- Price Index and Hang Seng Properties-Price Indexmatrix Hang Seng- Price

Index

Hang Seng Properties-

Price Index

Hang Seng-

Price Index

Pearson Correlation 1.000 .910**

Sig. (1-tailed) . .000

N 31 31

Hang Seng

Properties-

Price Index

Pearson Correlation .910** 1.000

Sig. (1-tailed) .000 .

N 31 31


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2) Correlation analysis of RE stock, GDP, household saving and price index

According to the data in table 12 and the correlation analysis result in table 13, we found that

SRESI have no exact correlation with factors such as SREPI, GDP, SUR and PI. But It is true that

all the factors above should be in correlation in market condition. For example, 90s continuous

growth of US economy pushes the Dow Jones index rise from 6000 to 10000.

For the sake of business circle, Shanghai index goes in a evident downward trend after a long time

increase. 9.11 disaster also worse the situation. Asia economic crisis have pulled down many

countries stable index (for example Japan, Korea and HK). In Shanghai, the bank savings of the

urban residents have increased by nearly 10 times and average growth is 24% per year. But we

found that the price index of the same period only doubles. The bank continuously drops interest

rate. However, all the factors mentioned above seem exert no influence on the RE stock market.

Table 12

Relevant data of the SRESI and SREPI

Year Shanghai

Real Estate

Share Index

Shanghai

RE Price

Index

GDP Saving of

Urban

Residents

Price

Index

95-Jan. 1000 1000 1000 1000 100

95-Jul. 994.16 993.63 1089 1219 109.3

96-Jan. 715.13 967.09 1178 1439 118.7

96-Jul. 1206.29 946.92 1270 1686 124.1

97-Jan. 1058.22 941.61 1316 1934 129.6

97-Jul. 932.72 888.54 1363 2964 131.4

98-Jan. 942.79 858.81 1429 2194 133.2

98-Jul. 974.01 759.92 1496 2324 133.2

99-Jan. 761.94 742.22 1566 2454 133.299-Jul. 1076.71 725.56 1636 2574 134.2

00-Jan. 966.96 721.39 1755 2694 135.2

00-Jul. 1180.45 734.94 1847 2653 138.4

01-Jan. 1249.81 743.28 1941 2613 141.6

01-Jul. 1243.88 783.94 2009 2872 141.7

02-Jan. 914.86 816.26 2109 3132 141.9

Data resource: Shanghai statistic year book and information from investment companies

Table 13

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The Correlation Matrix of Shanghai Real Estate Share Index and other index

Matrix Shanghai Price

Index of Real

Estate

GDP Index Saving of

Urban

Residents

Price Index

ShanghaiReal EstateShare Index

Pearson Correlation -.203 .356 .175 .275

Sig. (1-tailed) .234 .096 .266 .161

N 15 15 15 15


Conclusion

1. In aim at gathering capital for the state-owned enterprises, Chinese stock market and RE stock

do not operate in general rule.2. Chinese stock market is typically the market in policy control, the government adopts a

series of policies to regulate and stimulate market.

3. RE investment is a capital-intensive enterprise. Securitization system is the warranty of RE

market development. But Chinese RE securitization is far from effectiveness. The scale of

listed RE company is small and its stock price is obviate from its business performance.

4. The government control almost 70% share of the companies. The investor interest seriously

harmed by the weak management and policy unstableness.

The government now is considering reducing the state-owned shares in aim at make the market

more effective. The listed companies as well increase its scale by issuing new stocks. But how to

reestablish the investor confidence is the most important and urgent aspect that deserve us to

think.

Reference cited

Zhang, zhong-xin (2002), analysis on system of Chinese stock market and its low

efficiency, Investment and Securities, volume 4

Yu, wen-tao (2002) ,Current situation of Chinese finance and relevant considerations,

Shanghai investment, 167,1,30-33

Huo, Qiang(2002), strategically consideration of state-owned shares reducing ,

Shanghai investment, 167,1,9-13

CREIS Chinese real estate Shanghai index report(2002), Shanghai investment

Xu, jun-hua (2001) security company strategy after WTO entry, Journal of finance

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research(in Chinese), volume 9

Shanghai Real Estate Market (2001), China Statistics Press :Beijing

Brueggeman, Fisher (1997) Real Estate Finance and Investments (tenth edition),IRWIN/McGraw-Hill

13

Documents

Empirical Analysis on Chinese Stock Market and Real Estate Stock