Xinhua Finance Ltd. (TSE Mothers: 9399 and OTC: XHFNY) and the Milken Institute today jointly released the Chinese Privatization Indicator (PVI) and the Chinese Mergers and Acquisitions Indicator (MAI), the latest in an eight-part series of Xinhua Finance/Milken Institute China Economic Indicators. These indicators provide investors and financial professionals deeper insight into two important aspects of China′s markets: China′s transformation towards a more market-oriented economy and Chinese market players′ efforts to consolidate themselves through mergers & acquisitions. Both of these indicators will be updated on a quarterly basis.
The new indicators show that the premiums paid in Chinese M&A deals increased slightly in the first three quarters of 2007 compared to the same period in 2006; however, they remained far below highs reached in 2000. Privatization increased in the first half of 2007, but was also below the high in 2002.
"We′re pleased to pioneer the market once again by launching the two new indicators tracking these dynamic changes in China′s economy," said Daniel Connell, COO of Xinhua Finance. "Bolstered by solid market understanding and reliable methodology, these indicators provide a scientific way to track the market trends and demonstrate both organizations′ continued efforts on enhancing the transparency of China′s markets."
Chinese Privatization Indicator (PVI): This indicator tracks China′s privatization process as formerly state-owned companies become shareholding companies, or state-owned shares are sold to private and individual investors. It also analyzes the ownership composition of Chinese firms by measuring state-owned assets relative to privately owned assets. China′s steps toward changing company ownership structures is expected to enhance business productivity and maintain sustainable growth as privately owned firms are generally believed to be more efficient than state-owned firms.
While Chinese privatization has definitely increased through initial public offerings and share-structure reform, government assets still account for a major portion of Chinese firms′ market share. The indicator tracks privatization value, which can range from zero (total government ownership) to 100 (complete privatization), since December 2000.
While remaining relatively flat at about 40 for the first five years, the PVI had a ten percent decline in 2005, from 42.0 to 35.7. This decline reflects the fact that large market-cap companies were privatized, but maintained significant government ownership. The indicator value, as of June 2007, had moved up to 38.1, but it remains below its highest value of 42.0, set in 2002. The indicator analyst expected that the indicator values should go up again since the state continues its reforms to reduce government ownership in firms.
Chinese Mergers and Acquisitions Indicator (MAI): The MAI looks at China′s increasing and broadening M&A activities and tracks the premium being paid for companies in this expanding market. It compares the fair value of current transactions to the book value of target companies. An MAI value greater than 1.00 indicates that a premium was paid relative to book value, and a value less than 1.00 shows that the acquiring firm paid a discounted price. Sub-indicators are also calculated for 28 specific industries and for cross-border inward, cross-border outward and domestic deals.
As of the third quarter of 2007, the MAI shows that while the number of completed deals and their associated values have significantly increased over the past few years, companies appear to be demonstrating relative restraint in the prices paid for their acquisitions. This is particularly evident when comparing more recent 2006 and 2007 MAI values, ranging from 1.00 to just above 2.00, with MAI values in 2000, which surged to above 7.00. MAI time series start from the first quarter of 1995.
The indicator also shows that although cross-border deals have grown steadily in the past decade, they have greater MAI values than domestic deals, with outward cross-border M&A deals significantly higher.
Glenn Yago, director of capital markets at the Milken Institute noted that latest indicators further round-out the picture for those seeking to understand the trends in China′s growing economy.
"These two new indicators provide an at-a-glance look at how corporate ownership and value are changing based on actual data, not just anecdotal information," said Glenn Yago. "This is increasingly important as the Chinese economy matures and seeks stable growth and investors are becoming more selective."
Xinhua Finance, China's leading financial information and media service provider, and the Milken Institute, one of the world′s leading economic think tanks, partnered to create a set of eight new economic indicators tracking China′s markets. The indicators utilize Xinhua Finance′s extensive local know-how and the Milken Institute′s expertise and established methodologies for capital-market research.
The launch of the PVI and MAI indicator brings the series of available indicators to seven. The other available indicators are the Renminbi Pressure Indicator (RPI), the Chinese Initial Public Offering (IPO) Indicator, the Market-Adjusted Debt (MAD) Indicator, the Banking Strength Indicator (BSI) and the Adjusted-Trade and Finance (ATF) Indictor. All of the current indicators are available at chinaindicators.milkeninstitute.org.