"I have been reading your various recent comments on China about supply overhanging the Shanghai stock market in the form of big fund raisings. These you say will be over by November or was it by the end of November? But you or one of your contributors....also say that many lock-up periods will end then too. I am wondering whether this may create another source of supply to the market. The question arose in my mind because I was doing some very superficial research into Pingdingshan Tianan Coal and noted that the end of a lock-up earlier this year appears to have caused a halving of the share price."

And

"Further to my earlier email, I may be wrong/confused about Pingdingshan Tianan Coal. Nevertheless, my general question about the ending of lock-up periods still stands."

Eoin Treacy's view Thank you for these poignant questions. There are a number of factors at play in the underperformance of Chinese large caps stocks which tend to dominate the Shanghai A-Share market. Some of these include the raising of reserve requirements for banks which has led to an increase in equity placements, The Chinese manufacturing sector has been through a tough year following the slowdown in demand from the USA and Europe. The focus of central bank tightening measures have been focused on the housing sector which has had a disproportionate effect on large caps.

In addition to these concerns, the gradual un-locking of the government's stock of non-tradable shares has averaged Rmb50 billion a month this year and RMB115 billion are set to be unlocked in November. One further bulge in the schedule can be expected in May 2011 after which the process will be almost complete. This schedule is publically available so we can expect it to be factored into prices for the concerned shares. (Also see Comment of the Day on September 3rd and 17th).


I'm afraid I do not have access to the individual schedule for Pingdingshan Tianan Coal but notice that it shares a similar chart pattern to other coal companies such as Shenhua Energy. Commonality across the sector may be a better explanation of Pingdingshan Tianan Coal's underperformance than the non-tradable shares issue.

The supply of shares through, additional issuance, IPOs and non-tradable shares has acted as a headwind for the Shanghai A-Share market. Consumer led sectors in the Index have outperformed as have smaller and mid-cap indices indicating the focus of investor ire has been on the large cap sector. Nevertheless, valuations close to current levels have historically represented value in the Chinese market. A catalyst in the form of a reversal of central bank tightening or a reduction in supply of new shares would likely help to spark investor interest.