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The authorities announced yesterday that the
share merger reform would be
extended to the whole market, sparking a smart rally on the Shanghai and
Shenzhen bourses.
Five State departments announced guidelines pushing the reform process
ahead since the pilot projects
on share mergers had proved successful and were well received by the
markets.
This prepared the ground for expanding the reform, according to the
circular, which outlines the general direction of the process.
The China Securities Regulatory Commission encourages all mainland-listed companies to choose a
suitable time to merge their tradable and
non-tradable shares, the circular said.
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 would enjoy the same favourable 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
national economy or national security, the circular said, because "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 favourable 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 non-tradable
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
per cent 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 (US$5.7 billion), are
traded in the mainland with foreign currencies.
There are about 17 billion yuan (US$2 billion) worth of H shares, which
are stocks of Chinese mainland companies listed on the Hong Kong Exchange
and available to any investor.
The latest reform is the third attempt at share mergers two previous
efforts in 1999 and 2001 failed to address the problem.
The markets cheered the latest attempt with the benchmark Shanghai
composite index ending at 1167.14 points, 1.49 per cent higher than
Tuesday's close.
(China Daily) | 
Updated: 2005-08-25 15:37
