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.
