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Comment: Time to move State share
( 2003-12-01 07:58) (China Daily)

The huge amount of non-tradable State shares in listed companies has proved to be a drag on the stock market. They constantly unsettle investors who are ruffled by occasional rumours of when and how they will be traded.

The latest rumour came early last week. Although it was later disavowed by securities authorities, it again shone the spotlight on the need for a prompt solution to this ongoing market headache.

A Beijing-based newspaper, the Economic Observer, said last Monday that securities authorities have reached a consensus on a new policy on trading of State shares. The new policy would base the value of these shares on the company's net assets.

At the same time, a "tradable shareholders approval system'' would be introduced, under which any new scheme would need the approval of 50 per cent of holders of tradable shares.

The second part is supposed to protect the interests of relatively weak holders of tradable shares who may be easily sidetracked in corporate meetings dominated by non-tradable shareholders.

The motivation for the system is to avoid a violent market reaction if and when the plan is announced.

A look at history may be helpful to understand why this is such a common topic of discussion.

When China launched its stock market in 1991, shares of listed companies, the majority of which were State-owned, were divided into common or tradable and non-tradable State ones.

The State shares made up about two thirds of the total share value.

The market has grown rapidly in the past decade but the majority of those untradable shares have proved to be a threat to the long-term health of the market. Since only a small part of the existing shares could be traded, the market became less stable and easier to manipulate.

More seriously, those shares could not remain untradable forever so their possible sell-off serves as a Damocles sword for investors. Many fear a sale of untradable shares would dilute the value of their shares without repletion of adequate capital into the market.

That particular sword fell in June 2001 when the State decided to sell a small portion of shares after issuing an interim method on the issue.

The market reacted with a selling spree, which ushered in the spectre of two and half years of bear-like conditions.

While experts argued the State's share sale was not the sole reason for the downslide -- for example, around that time the central bank launched an investigation into banks' practice of using credit funds to invest in the stock market -- they conceded it was a major one.

That same year, the worry that more sales might be at hand sent Shanghai's yuan-denominated A-share market into a 35 per cent tailspin between May and October.

Authorities put a stop to the plan in October of that year.

Last June, more than a year after the sale plan was announced, the State Council scrapped it. But the damage had been done.

The nosedive from the record high of mid 2001, drained a total of 1.2 trillion yuan (US$145 billion) in market value by the end of July.

This year Shanghai's A-share index has risen by just 7 per cent, underperforming key international benchmarks, while the index of B shares -- US dollar-denominated stocks open to foreign investors -- has declined by 12 per cent.

It shows the market is yet to pull out of the down cycle.

A look at the events of June 2001 surrounding the sale of State shares makes it clear that the policy failure comes less from the plan itself than from the proposed high price of sales, which the market refused to accept.

The sixth article of the implemented sale method has it that the sale should be set in accordance with market prices.

Investors thought it would be acceptable to price State shares on net asset value.

There are at least two morals to this brief review of history.

First, the issue must be promptly resolved to end lasting market uncertainties and allow it to be revitalized.

Second, price levels based on net asset value are preferred to values based on the market level.

Since the halt of the sales plan last year, whenever there was a rumour that the plan would resume, the market reacted violently.

That has led some experts to urge authorities to finalize a policy for the trade of State shares as soon as possible so that punters can no longer take advantage of the issue to benefit from market fluctuations.

Indeed, the longer the authorities delay the issue, the more complicated it will become. This, in turn, will make it more difficult to find a proper solution to satisfy all.

Since the late 1990s, the country has been reforming its State enterprises into multi-ownership entities. The reform conforms with the country's strategy to retreat the State economy from those common sectors while holding on to those economic lifelines.

During the reform, some State shares have been on sale, even before the June 2001 State shares sales plan came out.

Last November, foreign investors were given the go-ahead to purchase State shares in listed companies.

With more State shares going into the hands of non-State owners, any future plan to trade them in the market would be faced with a price crisis as the new owners will demand prices similar to market levels to ensure their interests.

Since the halt of the State shares trading plan last June, there have been several new draft plans submitted to the authorities. Meanwhile, experts and professionals have on every possible occasion lobbied for their own suggestions. Policy-makers have had adequate references to manoeuvre with.

It is time for them to make a decision.

What distresses policy-makers is the pricing, undoubtedly. It is the primary reason for the dragging on the issue.

But what is also sure is that,so long as the net asset value principle is respected, the market will not reject new policies as fiercely as it previously did.

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