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    Greater China
     Aug 27, 2005
China goes whole hog on share reforms

BEIJING - Government stock market regulators announced August 24 that the share merger reform would be extended to the whole market, sparking a smart rally on the Shanghai and Shenzhen bourses. Five departments of the national government announced guidelines pushing the reform process ahead, after the pilot projects on share mergers proved successful and were well received by the markets. This prepared the ground for expanding the reform, according to the official circular, which outlines the general direction of the process. The latest reform is the third attempt at share mergers; two previous efforts in 1999 and 2001 failed to address the problem.

According to the circular, the China Securities Regulatory Commission encourages all mainland-listed companies to choose a suitable time to merge their tradable and non-tradable shares. Listed companies which complete the merger would be given


priority to raise new capital; and all shares in future initial public offerings will be tradable. However, details of the reform procedures have yet to be revealed to the companies, said Hua Sheng, a well-known economist based in Beijing.

The circular says partners of joint ventures will enjoy the same favorable policies as before even if their share percentage in the company changed due to the reform. The state will retain controlling shares in pivotal industries vital to the national economy or national security, the circular noted, because "the [intention of the] reform is to solve the systemic problems of China's stock market rather than to sell state shares". The regulator also promised to continue to take measures to maintain market stability while extending the reform.

Individual investors would continue to enjoy favorable tax policies for capital gains in the stock market. Institutional investors, such as qualified foreign institutional investors and insurers, would be allotted more quotas for stock investment; and corporate pension and social security funds would be encouraged to invest in the stock market. The increased capital flow would energize the market, said Dong Chen, a senior analyst in China Securities.

Moreover, controlling shareholders can buy back company stock on the market. The regulator said listed companies can even repurchase stock with money raised through corporate bonds or bank loans. This would help prevent sharp falls in stock prices, Dong said. Well-managed listed companies are encouraged to consolidate operations through mergers or acquisitions while poor performers are advised to bring in foreign strategic investors or inject high-quality assets to improve their performance. The regulator also indicated that a new stock index would be launched to track the movement of listed companies with tradable shares.

Moreover, other derivatives would also be launched to diversify the range of financial products. For example, warrants can not only be used to compensate investors while floating nontradable shares but also to raise additional capital. The brokerage sector would also undergo restructuring. Financially-sound brokers are encouraged to issue corporate bonds or apply for bank loans to ease cash-flow problems, the circular said.

Poor corporate governance has become rampant with the creation of two classes of shareholders, and minority shareholders having little say in a company's operations. The market, in the meantime, became distorted because as many as two-thirds of the shares were barred from the trading process, said economist Hua. "A" shares worth about 1,000 billion yuan (US$120 billion), of which 65% are state-owned and currently non-tradable, are stocks of companies incorporated in China and traded in the mainland market. "B" shares, which amount to about 6 billion yuan, are traded in the mainland with foreign currencies. There are about 17 billion yuan worth of "H" shares, which are stocks of Chinese mainland companies listed on the Hong Kong Exchange and available to any investor.

Time is ripe: Top regulator
China's top capital market regulator said August 24 that the time is ripe for China to carry out state share reform, after nearly four months of experiments. The smooth progress of the experimental reforms over the past four months indicates that the principles and approach to the reform had been accepted by market participants, said a senior official of the China Securities Regulatory Commission, who declined to be named. The commission published a 22-article guideline on the reform earlier August 24, in collaboration with the Ministry of Finance, the country's central bank and two other ministerial departments.

The official was referring to the payment of compensation by listed firms or majority stockholders to minority stock holders in exchange for mass untradable shares held by the firms or by majority stockholders to float on the market. Minority stockholders were given about two to four shares in compensation for every 10 shares they have, the exact number depending on the individual company. A total of 46 listed firms in two chronological groups took part in the experiments, and only one of the reform programs proposed by the firms was vetoed by public stockholders at a shareholders' meeting, as they were not satisfied with the compensation offer.

The official said ongoing split-share reforms to make state shares tradable on the stock market, efforts to increase institutional investors and improvements in the capital market legal framework are progressing smoothly. Therefore, there was a solid foundation for the reforms to be completed in an active and safe manner, he said in an interview with Xinhua. The reforms of eligible listed companies would speed up if these firms and their reform proposals were welcomed by the market, he added.

Investors in China's B-share and H-share markets, however, will not take part in the A-share market reform, and therefore will not get compensation, the official said. But the official stressed that any reform plan by a listed firm which also issues B-shares or H-shares should not in any way harm the legitimate interests of other B-shares or H-share holders. A-shares refer to those issued by domestically listed firms for Chinese investors. B-shares are issued by Chinese firms and denominated in US dollars. H-shares are issued on the Hong Kong market for overseas investors.

The commission is also working on regulations with other government departments to improve the corporate governance of listed firms, one of the major factors blamed for the sluggish Chinese securities market. The official described the reform as an institutional revolution of the capital market, which will help to improve the stock market's pricing mechanism and to address long-lasting problems troubling the market.

Earlier this month, Shang Fulin, chairman of the commission, said that huge demand for capital for the country's economic growth and restructuring and an increase in corporate and individual investment capability showed that there is a broad space for the development of China's capital market. The Chinese government published a nine-point strategy to revive the capital market in February 2004, stating that a sound and healthy capital market was essential for the country's economic reform and development. The government has set up six task forces, involving a number of ministries, to implement the strategy. To increase the money supply for the market, the Chinese government has announced a series of measures to encourage investment in the capital market, boosting the development of institutional investors and lifting bans on direct investment by major commercial banks and the state pension fund.

As part of the measures, the regulator increased the quota of qualified foreign institutional investors (QFII), which are foreign companies permitted to buy shares in domestic companies, by $6 billion, bringing the total quota for QFII to $10 billion, said Shang. The Chinese legislature is amending the country's securities and corporate laws in a bid to crack down harder on crimes involving securities and to give state-owned firms greater access to the capital market.

China's two stock markets, which were created 15 years ago in Shanghai and Shenzhen respectively, have fallen continuously since 2001. Poor corporate governance and untradable state share problems have been blamed for poor market performance in the past few years. China has nearly 1,400 domestically listed firms.

(Asia Pulse/XIC)

China state share sales- shhhh! (Jun 30, '05)

China's stock market reforms (May 24, '05)

Four firms to pilot China stock market reform (May 10, '05)

China's SRC to attack share structure problem (May 3, '05)

China moves to cage its rampaging bears (Jan 20, '05)

The stock market a casino for Communists (Oct 9, '04)

China's equity markets: buyer beware (May 9, '03)


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