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The authorities announced yesterday that theshare merger reformwould 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 thepilot projectson 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 allmainland-listed companiesto choose a suitable time to merge theirtradable 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 futureinitial public offeringswill 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 ofjoint ventureswould 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 asqualified foreign institutional investorsand insurers would be allotted more quotas for stock investment; andcorporate pensionandsocial security fundswould 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 throughcorporate bondsor 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 foreignstrategic investorsor 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,warrantscan 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 easecash-flowproblems, 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)
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Updated: 2005-08-25 15:37
