Zhang Wenkui

Research Report No 151, 1329

China’s listed companies have a history of merely 10 years. So far, the total number of listed companies in China is only a little more than 1,000. Nevertheless, these companies hold an ever more important position in China's national economy, and their economic activities have an ever more important influence upon the national economy. In recent years, the restructuring of listed companies is getting popular, having posed an eye-catching phenomenon in China's economic life, which draws extensive attention from the economic community. According to incomplete statistics, the number of cases of restructuring of China’s listed companies stood at 705 in 1998 and shot up to 1110 in 1999. In the first half of 2000, the number of major restructuring cases hit 148 as quoted in the Notice on Standardizing Listed Companies' Major Purchases or Sales of Assets promulgated by China Securities Regulatory Commission. Compared with the companies listed in developed stock markets, China’s listed companies are unique in terms of their equity structure, performance and management, so are the economic and legal conditions under which they operate. It is therefore of great significance to analyze these unique characteristics and dig out the root of the problems that dog the restructuring of China’s listed companies.

I. History and Characteristics of Restructuring of China’s Listed Companies

Although restructuring of China’s listed companies started in 1993, it was launched sporadically before 1997. In 1993, Bao An corporation purchased the shares of Yan Zhong corporation on the secondary stock market. This enlarged its holding of the latter's shares from 4.56% to 18%, and turned it into the biggest shareholder. Although Bao An corporation did not succeed in taking over Yan Zhong Corporation, it became a pioneer in China to purchase the shares of a listed company. In 1994, another form of restructuring with Chinese characteristics was invented by Heng Tong Corporation when it purchased Ling Guang Corporation: negotiated transfer of the state-held shares of the listed company and conduction of self-dealings. At that time, Heng Tong attained 35.5% of the 55.26% of the state-held shares of the Shanghai Lingguang Industrial Company, the parent company of Ling Guang, and was exempted from the obligation to declare a tender-offer. Although these two cases of purchases startled people for the time being, there were not many followers due to the immaturity of the objective environment. With deterioration of the macro economic situation in the years after 1994, some China’s listed companies found themselves in financial difficulty in 1995 and 1996 and some even in red, which gave rise to a special treatment group (known as the ST companies on the stock market). The emergence of the loss-incurring companies and the ST group meant that some listed companies would be disqualified for stock allotment or even be exposed to the danger of being delisted. Since listing quotas and qualification for allotment had an important bearing on regional economies, local governments would try every means to keep their listed companies going on the stock market or to qualify them for allotment, which in turn led to the surge of restructuring of listed companies directed by local governments. In 1996, the Shanghai Municipal Government took the lead in the country to propose the restructuring of listed companies in financial mires to retain their "shell" and qualify them for the allotment of new shares, and also picked out a group of listed companies such as Zhong Cheng Shi Ye and Lian He Shi Ye, for the purpose. The restructuring of listed companies initiated by the Shanghai Municipal Government was copied by one local government after another, and began to heat up rapidly across the country since 1997. The result is a constant increase in the number of cases of restructuring and in the amount of value involved. In view of accelerated momentum of structural readjustment and quick pace of polarization among enterprises, restructuring masterminded by local governments and spurred by market forces has both been in the ascendant since 1999.

When the restructuring of China’s listed companies is viewed broadly, it can be discovered that it has something distinct from that of ordinary market economies. China’s listed companies are fairly special in terms of origin, relationship with the government, financial preference, and motif of restructuring. All these factors have left a strong mark in the restructuring of China’s listed companies.

1. "Keep shell for allotment and borrow or buy shell"

A fairly large number of cases of restructuring of China’s listed companies have been initiated toward the goal of keeping listed companies in action or qualifying them for the allotment of new shares, or selling shares under the "shell" borrowed or bought from listed companies. This mode is in essence designed to raise funds from the securities market at low costs and with small responsibilities. So far, Chinese enterprises have still relied upon bank loans as their major form of financial resources. Because most enterprises are haunted by comparatively big debt ratios, the stock markets of the country are still at their early stage of development and generally in short supply, the stock market has small restrictions to and pressure on listed companies, the costs for raising funds through stock trading are much smaller than those for direct loans, and almost no responsibilities are involved, enterprises have a strong inclination to raise funds on stock market. At the same time, however, Chinese enterprises face much tighter restrictions than those in market economies when they come to pool funds from the stock market. While old state-owned enterprises enjoy easier access to stock market, some latecomers and newly established hi-tech or non-governmental enterprises, in particular, have more difficulties to raise funds from the stock market. For this reason, the "shell" resources of listed companies have gained a comparatively big value. To reallocate these "shell" resources by restructuring, or to take the chance of restructuring to seize, keep hold of, or make full use of these "shell" resources continually is in line with both the interests of local governments and the aspirations of many non-listed companies. The fall of some listed companies into deep financial mires and the approach of some others to the brink of bankruptcy have also created the opportunity for restructuring.

2. Negotiated transfer of equities

Negotiated transfer of state-owned and institutional equities is the main mode of restructuring of China’s listed companies, and there is a tiny number of cases of acquisition through the secondary market. This is determined by the equity structure of China’s listed companies. Because the non-tradable state-owned and institutional equities of China’s listed companies account for about 62% of the total, negotiated transfer of state-owned and institutional equities has naturally become a mode of restructuring that can be applied most fast and easily with comparatively lower transaction costs. In addition, this mode can enable the government to play a leading role in the process of restructuring. Negotiated transfer was first introduced in the restructuring of Heng Tong and Ling Guang. After being legalized in the Securities Law put into force in 1999, this mode has come to win even greater favour. Negotiated transfer involves extremely small costs in operation, and is conducive to the promotion of the restructuring of China’s listed companies. It is more likely, however, to expose the interests of small shareholders to harms when compared with acquisition on the secondary market.