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Rules to Revitalize Market

A document released by the central government earlier this month on reform and development of the capital market outlined a plan to liquidize non-tradable shares in listed companies.

The nine-point document stressed that state-owned asset losses need to be prevented by regulating the sale of non-tradable stocks in the listed companies, while at the same time market rules should be respected in order to maintain the stability and development of the market.

It also stated the process must be carried out in a manner that is "both active and safe." That means the problem must be tackled gradually to maintain the stability and development of the stock market.

The document has rightly pointed out the route to achieving that goal: paying due respect to the market rules.

One of the fundamental market rules is exchange of equal values, which should also apply to securities as one of the financial goods.

But in the Chinese stock market, shares in listed companies are divided into tradable and non-tradable shares. Some listed companies even keep A shares (shares held by domestic public, denominated and payable in Renminbi), B shares (shares listed in China, denominated in Renminbi, payable in foreign currency and designated for foreign investors) and H shares (share listed in Hong Kong Stock Exchange) at the same time.

This situation results in different prices for shares of one company and produces shareholders of different status. It not only jeopardizes the long-term development of the stock market, but also hurts the interests of public investors.

Being a concern of most investors, the problem needs to be dealt with.

As stated in the document, China will keep its promise as a member of the World Trade Organization by soon opening its securities market.

Qualified foreign institutional investors (QFII) will be encouraged to invest in domestic securities companies and funds management companies.

More importantly, "domestic institutional investors will also be allowed to invest in the overseas capital market in the future. A system regarding qualified domestic institutional investors (QDII) should be studied."

That is to say, QDIIs will be allowed to penetrate the international capital market when conditions are mature.

As we all know, the issue prices and market prices of H shares are usually lower than those of A shares of the same listed firms. After QDIIs are allowed to enter the Hong Kong market, where it will be very easy to convert Renminbi into HK dollar, the A shares will see a slump in prices.

As a result, non-tradable A shares in listed companies will lose their special status. Non-tradable shares will be liquidized sooner or later and the remarkable premium in stock issuance will disappear as well.

Under the planned economy, commodity prices used to be subject to the "double track system," which was eliminated soon after the economic reform because it was obviously against the market rules. Now that China has become a WTO member, how far will the "double track system" in stock prices go?

According to Wang Lianzhou, a renowned expert in business law, China's economy will not become integrated into the global economy unless the country cures some fundamental ailments in its capital market before opening up the market in accordance with its WTO commitment.

The newly released document has rightly told the truth in urging an active and safe way to liquidize non-tradable shares.

The document also suggested stepping up regulating the transfer of non-tradable shares to prevent State asset losses.

If non-tradable shares are sold at a price at or even lower than the net asset value, it definitely hurts the interests of tradable shareholders and investors' confidence.

The document revealed that the government would "foster trustworthy, professional and law-abiding institutional investors to play a leading role in the capital market."

This is a significant change in wording. Obviously, regulators are now aware that only "trustworthy, professional and law-abiding institutional investors" can lead the market, which has been proven in the stock markets both at home and abroad.

We can also find that the document referred to "protecting the investors' interest" 15 times. It is a fair assessment to the contribution made by tens of millions of public investors to the development of stock market.

However, we also noticed that the statements and directions about respecting the market rules are quite abstract and general instead of laying out specific details about how to achieve them.

It is necessary to draft policies and rules which serve as instructions for achieving the outlined plan.

Only when administrative, legislative and judicial elements are mobilized can the farsighted guidelines designed by the document be put into practice.

For now, non-tradable shares and differences between the A share price and the H share price should be eliminated for every listed company.

With that, the equal interests of all shareholders will be better guaranteed.

(China Daily February 25, 2004) 

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