SOE Reform Invigorates Capital Market

When looking at industrial development trends in 2015， I mentioned that reform of state-owned enterprises （SOEs） would be a highlight of the stock market， one deserving the attention of investors. This prediction was only half right.

State-owned railway transportation equipment makers CSR Corp. and CNR Corp. combined in May to form CRRC Corp.， establishing a model for SOE reform.

The soaring stock prices of the two companies before the merger also brought considerable gains to investors confident in SOE reform.

However， I didnt expect the stock price of the newly established CRRC to be so high， valuing the new company at nearly 1 trillion yuan （$156.25 billion）.

The aim of the merger between CSR Corp. and CNR Corp. was not to stimulate the stock market but to seek business opportunities from the Belt and Road Initiative and free trade zones.

The sudden and irrational rise in the market value of the new company left little room for a further increase. Soon after， its stock price collapsed along with the rest of Chinas A-share market.

When the A-share market halted its decline and resumed slight growth， CRRCs stock price nonetheless remained low. Investors enthusiasm has been replaced by depression， intensifying the stagnation of CRRCs stock price.

Recently， listed subsidiaries of China Ocean Shipping （Group） Co. and China Shipping （Group） Co. have suspended transactions of their stocks， fuelling market expectations that the two groups may merge. These expectations have in turn pushed up stock prices of other SOEs with the potential for reorganization.

Although some investors still possess lingering fears about trading in SOE stocks after the dramatic fall in the price of CRRC stocks， most other investors think they have learned the lessons of the CRRC case and will not lose money.

In the short run， SOE reform may cause stock investors to have their hearts in their mouths， but it must continue as far as the government is concerned.

Chinas leadership places great faith in SOE reform. President Xi Jinping once said，“Chinas reform has entered a critical stage and a ‘deep-water zone， and we must lose no time in deepening reforms in key areas with greater political courage and wisdom.”

As the craziness of the A-share market subsides， investors have adopted a more cautious approach than they did when investing in CRRC stocks.

The lesson of CRRCs stock price plunge has been learned and stock prices of SOEs are unlikely be overvalued unless the whole market becomes gripped by another irrational frenzy that sends prices soaring.

Although Chinas stock market has yet to become a real-time barometer of the macro-economy， the lackluster state of the economy is likely to have an adverse impact on the stock market in the second half of 2015.

Moreover， massive SOE reform may affect the business operations of some enterprises， disrupting their development in the short term.

While this disruption may not be detrimental to large listed companies， market confidence could be impaired. Some irresponsible so-called experts may claim that poor business performance after SOE reform indicates its failure， causing stock prices to decrease further.

The reform is not merely about enterprises merging but enhancing the strength of SOEs to enable them to play their full role in a market economy.

How long the process will take depends on the joint efforts of the supervising authority， corporate management and employees， as well as the public.

The capital market has its own operating rules. The expectations of SOE reform appeal to investors. They will decide whether they will make long-term investment based on their confidence in SOE reform or alternatively， just try to make a quick buck.

Market value and price-to-earnings ratio are two important indicators of whether the market is rational. Investors should be cautiously optimistic.