By Lu Jianxin and Gabriel Wildau
SHANGHAI (Reuters) - China has adopted a slew of policies aimed at boosting its long-suffering blue-chip stocks, mired at depressed valuations, but analysts say it will take years to change an investment culture focused on speculation in small caps.
Since late November, regulators have unveiled a series of measures aimed at raising the overall quality of listed firms and making blue chips more attractive.
The measures include banning "back-door" listings via the purchase of listed shell firms on the small-cap board; encouraging richer cash dividend payouts; raising penalties for initial public offering (IPO) applicants who exaggerate earnings forecasts; and setting limits on first-day price rises for new shares.
But the dominant role of retail investors in China's equity market, among other factors, will prevent a quick change in an investment culture that focuses on small caps, analysts say.
Though many small cap shares have performed poorly for years, trade thrives on rumours of pending restructurings or bailouts, most of which never actually occur.
Official data shows that 81 percent of China's stock market turnover came from retail investors in 2012, an indication that years of regulatory efforts to increase participation of institutional investors have largely failed, analysts say.
Low dividends are another problem. In theory, China's GDP growth rate of 7 to 8 percent should equal the long-term average return on assets across the economy. In this context, typical dividend yields of 3 to 4 percent for blue-chip Chinese stocks don't look attractive.
These factors help account for the unusually wide gap in valuations between large and small cap stocks in China. The average price/earnings (PE) ratio for the Shanghai Stock Exchange, which hosts the bulk of China's blue chips, stands at only 11 times of 2012 historical earnings, while those for Shenzhen, dominated by small caps, at 28 times.
By comparison, the average PE ratio for firms on the New York Stock Exchange <.NYA> is 13, compared with 21 for NASDAQ <.IXIC>, according to Thomson Reuters Eikon.
"There are still lots of factors to push investors to pursue quick profits in small caps," said Guo Yanling, a senior analyst at Shanghai Securities. "You cannot expect this immature market, with a history of 20-plus years, to grow up to maturity overnight."
While many of the new rules push investors towards blue chips, others may have the opposite effect.
In particular, the resumption of IPOs which regulators suspended last October to support the sagging market, could hurt demand for them.
Since the establishment of China's stock market in 1990, IPOs have been suspended eight times as a way to support prices of existing shares. This time around, IPOs are expected to resume in January, and the market demand is likely to be strong, at least at first.
"The market is very thirsty for new listings after a vacuum of over a year," said a trader at a major Chinese brokerage in Shanghai. "Everyone is eager to seek opportunities from new listings. Such sentiment means no loss of enthusiasm."
In July 2009, when IPOs resumed after a 10-month hiatus, Sichuan Expressway's <601107.SS> shares more than quadrupled from their issue price in the first day of trading when they debuted in Shanghai. Similar examples abound.
To prevent such a craze, the Shanghai and Shenzhen stock exchanges issued rules this month to cap first-day price rises for newly-listed shares at 44 percent above their IPO prices.
Tight liquidity conditions in China's money markets may also discourage investors from shifting to blue chips. Tight money tends to depress asset prices across the board, but large-cap stocks often suffer most, since more funds are needed to support a price rise.
"Unless there is a super bull run, which is unlikely, to attract money from other assets such as properties into equities, I doubt there will be enough money for investors to shift their focus to large-capitalised blue chips for now," said Chen Huiqin, analyst at Huatai Securities in Nanjing. (Editing by Jacqueline Wong)