Foreign therapy for stock market reforms
(China Daily)
Updated: 2006-01-09 05:45

China's benchmark stock index rallied to a more than three-month high last week. The good start of 2006 was largely buoyed by the government's moves to further open the domestic stock market.

Surely it is too early to claim that a turning point has finally come to the market, which has turned bearish since 2001 in spite of robust growth of the national economy.

Yet, the recent gains bear out the public's increasing confidence in the stock reforms, especially with the introduction of more foreign investors.

A new rule made public early last week allowed overseas investors to buy exchange-traded A shares starting from January 31, provided they acquire at least a 10 per cent stake and hold the stock for three years.

This attempt to invite foreigner strategic investors may help facilitate the country's ongoing reform to address non-tradable shares mainly owned by State or legal entities. Such shares make up about two thirds of the shares listed on the domestic market, and have long threatened to glut the market while undermining the supervision of majority shareholders.

After several fruitless efforts to convert them into tradable shares in recent years, the central government kicked off a new round of share-merge reforms last April with unprecedented resolve.

More than 300 firms out of the country's 1,300-odd listed companies embarked on this inevitable reform last year. And it is believed that a large part of domestically listed-companies will finish the programme to convert their non-tradable stockholdings this year.

Removal of a split share structure is a prerequisite to reviving the domestic stock market, which has so far failed conspicuously in assuming its fundamental role of improving capital allocation.

However, to see through the share-merge reform, the securities authorities must be quick to prepare for emerging problems.

Liquidity concerns following the launch of the country's non-tradable-share reform programme is one of them. Though majority shareholders all promised to float those once-non-tradable stocks after only a span of a few years, the future pressure on liquidity will weigh on public investors from now on.

Allowing foreign investors to buy strategic stakes in listed companies can effectively ease liquidity concerns.

Qualified foreign institutional investors have kept asking for more investment quotas regardless of the poor performance of the domestic stock market in recent years. It is clear evidence of foreign investors' rising enthusiasm to enter the domestic stock market, which, in theory, is bound to boost and benefit most from fast growth of the Chinese economy.

The year-beginning rally has confirmed the public's expectations of new cash inflows.

Nonetheless, more important than drawing in large overseas capital, the latest efforts to open the stock market points to improving listed companies' corporate governance.

This issue will be of far-reaching significance to not only the sound development of the stock market but also the efficiency of the national economy.

Foreign strategic investors are usually deemed more capable of advanced management and effective supervision than domestic shareholders. By enlisting the help of foreign strategic investors, the securities authorities can thus goad listed companies to behave in a more responsible way.

The same approach was adopted by the banking authorities to accelerate market-oriented transition of major State-owned banks last year.

It remains untested if the therapy will work as expected for both banking reforms and stock reforms.

But at present, the determination of the authorities to leave no stone unturned in advancing stock market reforms is more than sufficient.

(China Daily 01/09/2006 page4)