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Securities Watchdog on Share Reform, H-shares, B-shares

China's top capital market regulator said Wednesday the time is ripe for China to carry out state share reform after nearly four-months of experiments.

The smooth progress of experiments in this regard over the past four months indicates the principles and approach to the reform have been accepted by market participants, said a senior official of the China Securities Regulatory Commission who declined to be named.

The official was referring to the payment of compensation by listed firms or majority stock holders to minority stock holders in exchange for the mass untradable shares held by the firms or the majority stock holders to float on the market.

Minority stock holders were given about two to four shares in compensation for very 10 shares they have.

The commission published a 22-article guideline on the reform earlier Wednesday, in collaboration with the Ministry of Finance, the country's central bank and two other ministerial departments.

A total of 46 listed firms in two groups took part in the experiments, and only the reform program proposed by one of the firms was vetoed by public stock holders at a plenary session of the shareholders of the company as they were not satisfied with the compensation offer.

The official said the ongoing reform to make state shares tradable on the stock market, efforts to increase institutional investors and improvements in the capital market legal framework are progressing smoothly.

Therefore, there is a solid foundation for the reform to be carried out in an active and safe manner, the official said in an interview with Xinhua.

According to him, the reform of listed companies eligible for the reform will step up their reform pace if these firms and their reform proposals are welcomed by the market.

Investors in China's B-share and H-share markets, however, will not take part in the A-share market reform, and therefore will not get compensation, the official said.

But the official stressed any reform plan by a listed firm which also issue B-shares or H-shares should not in any way harm the legitimate interests of other B-shares or H-share holders.

A-shares refer to those issued by domestically-listed firms for Chinese investors. B-shares are issued by Chinese firms and denominated in the US dollar. H-shares are issued on the Hong Kong market for overseas investors.

The commission is also working on regulations with other government departments to improve corporate governance of listed firms, one of the major factors blamed for the sluggish Chinese securities market.

The official described the reform as an institutional revolution of the capital market, which helps improve the stock market's pricing mechanism and address long-lasting problems troubling the market.

Earlier this month, Shang Fulin, chairman of the commission, said huge demand for capital for the country's economic growth and restructuring and an increase in corporate and individual investment capability represent broad space for the development of China's capital market.

The Chinese government published a nine-point strategy to revive the capital market in February 2004, stating that a sound and healthy capital market is essential for the country's economic reform and development.

The government has set up six task forces involving a number of ministries to implement the strategy.

China's two stock markets, which were created 15 years ago in Shanghai and Shenzhen respectively, have fallen continuously since2001. Poor corporate governance and untradable state share problems have been blamed for the poor market performance in the past few years.

China has nearly 1,400 domestically listed firms.

To increase the money supply for the market, the Chinese government has announced a series of measures to encourage investment in the capital market, boosting the development of institutional investors and lifting bans on direct investment by major commercial banks and the state pension fund.

As part of the measures, the regulator increased the quota of qualified foreign institutional investors (QFII) by 6 billion US dollars, bringing the total quota for QFII to 10 billion US dollars, said Shang.

The Chinese legislature is amending the country's securities and corporate laws in a bid to crack down harder on crimes involving securities and give state-owned firms greater access to the capital market. 

(Xinhua News Agency August 25, 2005)

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