TASK CUT OUT: Shang Fulin, Chairman of the China Securities Regulatory Commission, says his organization is busy enacting rules to strengthen the stock market
　　
　　A list of listed companies that kicked off the 40th round of split share structure reform was published by the Shanghai and Shenzhen stock exchanges on July 10. To date, among the country"s 1,370 mainland-listed firms, 1,100 have completed, or are in the process of completing, share reform. The market value is put at 3.5 trillion yuan, accounting for 81.45 percent of the aggregate market value of the two bourses. This indicates that the split share structure reform that started on April 29, 2005 is drawing to a close.
　　“With the success of split share structure reform, the domestic stock market will no longer be a policy-oriented one. With the reduction and withdrawal of state-held stakes, government interference in the operation and management of listed companies will become less,” said Wu Xiaoqiu, director of the Finance and Securities Institute (FSI) under the Renmin University of China.
　　The split share structure is unique to the Chinese stock market. When the domestic stock market was set up in the 1980s, most of the listed companies were state-owned enterprises. So, at that time, it was stipulated that only publicly held shares representing one third of the total shares of listed companies could be traded on the stock market. These were called “tradable shares.” The other two thirds, held by the state or legal persons, could not be traded on the market. They were called “non-tradable shares.”
　　The biggest problem with the split share structure was unequal rights and profits for equal shares. This meant holders of non-tradable and tradable shares did not share common interests. This led to listed companies and large shareholders paying no heed to fluctuations in stock prices, which went against the interests of small and medium investors and severely impeded the development of China’s stock market. Whenever the market turned bearish, the government had to step in to revive it.
　　Moreover, the split share structure also affected the mergers of listed companies through stock transactions and the market-oriented allocation of assets, hindering the deepening of China’s economic reforms.
　　
　　EYEING THE CHARTS: Investors monitor the latest stock market data
　　
　　Since 2001, the Chinese Government has been attempting to solve the problem of the split share structure. The reduction of state-held stakes in listed companies was initiated in June 2001. State-held stakes were issued as company stock. Limited liability companies with state-held shares (including those listed overseas) were required to sell state-held stakes equal to 10 percent of the amount they would raise in an initial public offering (IPO) or in additional stock issue to public investors. Earnings from the sale of such shares were diverted to the national social security fund. But this attempt was rejected by the market as it was done at the expense of tradable shareholders’ interests. On June 23, 2002, this practice was stopped.
　　
　　In February 2004, the State Council issued the Guidelines on Promoting Reform, Opening-up and Steady Development of China’s Capital Market. It called for “solving the split share structure in an active and reliable manner.” After a year-long formulation of detailed rules, the share structure reform kicked off on April 29, 2005. By selling shares to tradable shareholders for free, the reform received widespread support from most shareholders.
　　According to the China Securities Regulatory Commission (CSRC), the share reform has been proceeding smoothly. Among those listed companies that are not on track for reform, some are looking for the right opportunity to start, some ST (special treatment) listed companies cannot afford the consideration involved, while others are restructuring their assets or transferring shares, pending approval by the supervisory authorities. All these companies must complete the share structure reform by the end of this year.
　　
　　Gains so far
　　
　　CSRC Chairman Shang Fulin said at a meeting in Beijing that the share reform has taken preliminary effect. It is promoting mutual benefit between non-tradable and tradable shareholders. After the reform, some listed companies have improved their asset conditions and capability to sustain the improvements; straightened out illegal appropriations of funds by large shareholders and the illegal guarantees that the listed companies provided to large shareholders for bank loans; increased dividend payments; and solved the problem of trading shares in the hands of public legal persons and employees that resulted from unclear policies and non-standard operations. The reform has been playing an important part in maintaining market stability, protecting investors’ legitimate interests and rights and bettering the quality of listed companies.
　　Shang noted that a new mechanism beneficial to the healthy development of the capital market is taking shape, such as a pricing mechanism, and non-tradable and tradable shareholders are sharing common interests. Risks have been eliminated to some extent and after the reform, former non-tradable shareholders holding two thirds of shares are concerned not only with net asset value but also price fluctuations on the secondary market.
　　After the year-long reform of the split share structure, especially since the beginning of this year, the domestic stock market has entered a bullish period as indicated by the steady rise of the stock markets. This has helped restore investor confidence and encouraged more capital inflows into the market. The composite stock index on the Shanghai Stock Exchange closed at 1,745.88 points on July 13 from 998 points in June last year.
　　FSI Director Wu Xiaoqiu said, “The split share structure used to be the biggest hindrance to China’s A-share market in the past. Common interests among shareholders, majority or minority, are becoming consistent. Price fluctuations have become the main concern for controlling shareholders. With a better incentive mechanism and higher operating pressures, managers are working harder to inject fine assets into listed companies and improve performance, rather than clearing out the company or transferring their profits.”
　　
　　Wu pointed out that after the reform process is completed, the domestic capital market will undergo dramatic changes in at least three aspects. First, the asset valuation function of the capital market will be gradually resumed and improved. The focus will shift from book value to considering profitability. The ability of assets to generate future cash flow will become a key indicator in asset valuation instead of the concept of net asset value. Second, market effectiveness will be improved. With an improvement of market functions, the notion of a policy-oriented market will wear off. Third, the domestic stock market, prone to disclosing false information, will face more challenges in information disclosure and transparency.
　　The share reform is of great significance to the domestic stock market in that it makes shares fully floatable, opening up the once semi-enclosed market and further internationalizing the capital market.
　　Foreign capital has begun to flow into the domestic stock market to merge or acquire Chinese companies by holding shares. At present, foreign investors taking part in mergers and acquisitions can be found in all sectors. On October 25, 2005, Xuzhou Construction Machinery Group Co. Ltd. signed an agreement with the U.S. Carlyle Group to sell an 85 percent stake in its subsidiary Xugong Group Construction Machinery Co. Ltd., which is still awaiting approval of the Ministry of Commerce, while the Swiss-based cement giant Holchin B.V. became the controlling shareholder of Huaxin Cement Co. Ltd.
　　The share reform brings the shareholding system of the domestic capital market in line with international practices. It is foreseeable that with the share reform drawing to a close, investment trends in the international market will soon be swiftly reflected in the domestic stock market. With the full opening up of the domestic securities market, the international market will tend to have a bigger impact. Before the reform, any change in the international stock market had no impact on the domestic one, and vice versa.
　　
　　Not a panacea
　　
　　Hua Sheng, president of the Yanjing Overseas Chinese University, said the split share structure is the main institutional defect of China’s stock market, but not its only drawback. Even after the share reform is completed, many other institutional flaws will remain. With the IPOs of fully tradable shares on the agenda, it is important to plug another institutional loophole--partial listing. This means part of the assets of a company, normally performing assets, go public.
　　Hua said, “Only when the A-share market has backbone enterprises of the national economy can the stock market become an economic barometer and enter a long-term bullish period indicating economic prosperity. Hence, public shareholders will become pivotal investors in the development of the national economy.”
　　In addition, Hua continued, there is still no big difference in stock prices of different companies in the domestic stock market, which has been improved to some extent with the deepening of the reform and internationalization. However, generally, stock prices are far from being largely differentiated. Stock prices of well-performing listed companies may be low, while stock prices of those doing badly can be high.
　　
　　The domestic stock market is far from perfect. Accounting oversight is also a big headache. In 2005, licenses of 18 accounting firms were revoked and 60 accounting firms were slapped with fines or ordered to reform and consolidate. According to the CSRC, it is losing no time to enact five administrative regulations on supervision of listed companies, supervision of securities companies, risk disposal of securities companies, administration of independent board directors and protection of securities investors.
　　“The final goal of market infrastructure construction, including share structure reform, is to facilitate the innovation and development of the market under a new mechanism,” said CSRC Chairman Shang.
　　Share structure reform only changes shares of listed companies from partially to fully tradable. Other incomplete aspects of the market are yet to be solved.
　　Qi Bin, director of the CSRC Research Center said, “Split share structure reform has been finished. The next reform will target the issue system.”

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