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China Briefings

Reports on China issued by Samsung Economic Research Institute

China Business Intelligence No. 17

China Business Intelligence No. 17

Samsung Economic Research Institute Beijing Office

Jan. 26, 2007

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Highlights

I. Stock Reforms Drive Chinese Bull Market in 2006

  • Due to historical reasons, a large portion of shares were not circulated in the Chinese stock market (held by state and individual holders), giving rise to the need for stock-market reform. At the end of 2004, 64% of the market's total shares did not circulate. Of the non-circulated shares, 74% were owned by the state, with the rest owned by corporate entities.
  • In 2005, the Chinese government introduced new reform proposals to compensate for non-circulating stock purchases. In order to protect investors, the government mandated that non-circulating shareholders (i.e., corporate and government entities) would have to compensate circulating shareholders. In April 2005, the government started an experiment to circulate these shares.
  • After the stock reforms are finished, the government will have limited ability to cushion a downward shock in the market. Previously, the market was highly influenced by government intervention which earned it the name of the "policy market." With these new reforms, the market will play a greater role in setting prices.

II. Analyzing Comparative Advantage and Competition Relations

  • The secret behind Galanz's success lies in mutual leveraging of comparative and competitive advantage. Given that producing microwave ovens is a "fast-cycle industry," firms need to take advantage of the interaction between comparative and competitive advantage in order to succeed.
  • In its growth process, Galanz effectively used "comparative advantage" to secure the "competitive advantage" and established a virtuous circle by developing the competitive advantage to strengthen its comparative advantage further.
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