Learn Chinese: Foreign therapy for stock market reforms

BIZCHINA / Analysis

Foreign therapy for stock market reforms
(China Daily)
Updated: 2006-01-09 14:43

China's benchmark stock index rallied to a more than three-month high
last week. The good start of 2006 was largely buoyed by the government's
moves to further open the domestic stock market.

Surely it is too early to claim that a turning point has finally come to
the market, which has turned bearish since 2001 in spite of robust growth
of the national economy.

Yet, the recent gains bear out the public's increasing confidence in the
stock reforms, especially with the introduction of more foreign investors.

A new rule made public early last week allowed overseas investors to buy
exchange-traded A shares starting from January 31, provided they acquire
at least a 10 per cent stake and hold the stock for three years.

This attempt to invite foreigner strategic investors may help facilitate
the country's ongoing reform to address non-tradable shares mainly owned
by State or legal entities. Such shares make up about two thirds of the
shares listed on the domestic market, and have long threatened to glut
the market while undermining the supervision of majority shareholders.

After several fruitless efforts to convert them into tradable shares in
recent years, the central government kicked off a new round of
share-merge reforms last April with unprecedented resolve.

More than 300 firms out of the country's 1,300-odd listed companies
embarked on this inevitable reform last year. And it is believed that a
large part of domestically listed-companies will finish the programme to
convert their non-tradable stockholdings this year.

Removal of a split share structure is a prerequisite to reviving the
domestic stock market, which has so far failed conspicuously in assuming
its fundamental role of improving capital allocation.

However, to see through the share-merge reform, the securities
authorities must be quick to prepare for emerging problems.

Liquidity concerns following the launch of the country's
non-tradable-share reform programme is one of them. Though majority
shareholders all promised to float those once-non-tradable stocks after
only a span of a few years, the future pressure on liquidity will weigh
on public investors from now on.

Allowing foreign investors to buy strategic stakes in listed companies
can effectively ease liquidity concerns.

Qualified foreign institutional investors have kept asking for more
investment quotas regardless of the poor performance of the domestic
stock market in recent years. It is clear evidence of foreign investors'
rising enthusiasm to enter the domestic stock market, which, in theory,
is bound to boost and benefit most from fast growth of the Chinese
economy.

The year-beginning rally has confirmed the public's expectations of new
cash inflows.

Nonetheless, more important than drawing in large overseas capital, the
latest efforts to open the stock market points to improving listed
companies' corporate governance.

This issue will be of far-reaching significance to not only the sound
development of the stock market but also the efficiency of the national
economy.

Foreign strategic investors are usually deemed more capable of advanced
management and effective supervision than domestic shareholders. By
enlisting the help of foreign strategic investors, the securities
authorities can thus goad listed companies to behave in a more
responsible way.

The same approach was adopted by the banking authorities to accelerate
market-oriented transition of major State-owned banks last year.

It remains untested if the therapy will work as expected for both banking
reforms and stock reforms.

But at present, the determination of the authorities to leave no stone
unturned in advancing stock market reforms is more than sufficient.

(For more biz stories, please visit Industry Updates)

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Wednesday, November 21, 2007

Foreign therapy for stock market reforms

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