Minority Investors

In May 2005, the China Securities Regulatory Commission in restored a program to convert all companies' non-tradable shares into tradable common stock. Investors, concerned the conversion of non-tradable stock would flood the market with unwanted shares without compensating minority shareholders, pushed down the Shanghai index to an eight-year low in July 2005.

To win approval from small investors this time, major shareholders of listed companies were required to offer free stock or cash as compensation for any loss tied to an increase in share supply. The regulator also imposed a yearlong moratorium on new share sales to ensure the market wouldn't be inundated.

China Petroleum, Asia's biggest oil refiner, also known as Sinopec, has climbed 105 percent since Oct. 10, when its parent gave public investors 2.8 shares for every 10 held as it converted its non-tradable shares.

`Upside' for China

To soak up the shares and prevent the market from slumping, the securities regulator allowed commercial banks to set up fund-management units and doubled to $10 billion the amount of money foreign investors can invest in domestic equities.

A total quota of $9 billion has so far been granted to 53 select overseas institutions under the qualified foreign institutional investor, or QFII, program.

China's economy, which in 2005 overtook the U.K. as the world's fourth largest, averaged annual growth of 9.6 percent in the past five years. It expanded 10.4 percent in the third quarter from the year earlier, spurring demand for loans and boosting banks' earnings.

"There is still upside for China's stock market," said Zhang Ling, who manages about $1.09 billion at ICBC Credit Suisse Asset Management Co. in Beijing. "We still have lots of good and big companies that have yet to go public."

Shares of China Merchants Bank, the nation's third-biggest publicly traded lender, more than doubled last year. It reported a 39 percent increase in net income for the first nine months as lending jumped 14 percent.

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