Liu Jipeng, famous joint-stock expert, Monday pointed out that several rumors must be clarified here. "The avalanche of the stock market, in a sense, is the continuation of the great debate on China's stock market which was started late last year. The correct approach to China's stock market lies in clarifying the 600-700 billion yuan idle funds in the primary market (market of issue). This is the key to explaining the strange phenomenon in China's stock market."

Liu thought that it is a one-sided view to attribute the plunge of the stock market to the reduction of state-owned stocks, which is widely spread in the present market. "Cutting down the state-owned stocks has not influenced the gross amount of the funds in the primary and secondary market (market of circulation). The reduced state-owned stocks will finally flow back to the stock market. In addition, the current measures of reducing the state-owned stocks mainly involve newly listed state-owned holding companies. It does not affect the deposits of the state-owned and corporate stocks of the existing 1,200 listed companies."

"Another rumor about the stock market slump was that investors, who disagreed with the reduction of state stocks, undersold their stocks to show their dissatisfaction. This view is not objective." Liu said that there might be different approaches to the method of reducing the state-owned stocks. However, it is just a groundless imagination to believe that investors will join hands to influence the market and thus cause the stock market slump, thereby incurring losses to the stock-holders.

Liu emphasized that the price of the stock market usually will see a sharp plunge when the profit rate reaches 60 times on average or the index of Shanghai Stock Exchange (SSE) hit 2200 points. This urges people to analyze the many long-standing strange phenomena in the stock market, for instance, why there has all along been 600-700 billion yuan of idle funds circulating in the primary market? Where did the funds come from? How much of this sum of money is illegal?

Liu also pointed out that the profit rate of the most lately issued stocks in the primary market can reach 60 or 70 times for the high rate, and over30 times for the low rate. It is the reflection of an immature market. Unreasonably issued prices brought great pressure on the secondary market. However, it is strange that these extremely high-priced stocks still have a large room for 50-100 percent of markup after entering the secondary market.

These phenomena have caused people to have the illusion about their bearing capacity in relation to China's securities market and also puzzled quite a number of experts. However, the pivotal point in understanding the phenomena lies in the serious unbalance of the supple-demand relationship in the primary market. It causes people to ponder this deeply that there is 600-700 billion yuan of idle funds in the primary market. In the face of the tremendous demand, some giant companies such as Sinopec sees a lucky rate of only 0.6 percent for the new securities.

"Obviously, serious problems do exist in the primary market", Liu said, "the methods to settle the problem, on the one hand, is to check up on the cause and effect of the 600-700 billion yuan idle funds so as to eliminate unlawful funds completely; on the other hand, is to issue new stocks so as to ease up the demand pressure.

(People’s Daily 08/01/2001)