The alphabet soup of Chinese stocks, already including A, B, H and N, has been thickened with G-shares, which are used to describe the shares of companies which have reformed (G for Gaige) their shareholder structures.
The concept was launched in June, and by early November, the number of G-share companies on the Shanghai and Shenzhen exchanges numbered 102. It is anticipated that a G-share index, of which there has been much talk, will soon be launched to monitor the progress of these companies. It now remains to be seen whether the reforming companies will transcend the sloth, inefficiency and market insensitivity of many, if not most, of China's listed companies – which are still majority-owned by the state and thereby protected from the pain of having to operate in a commercially viable way in the interests of all shareholders.
The state is divesting itself of shares in many listed companies, and those firms that make progress in extricating themselves from the grasp of Central Planning get to join the G-share list. On November 7, the market capitalization of the 102 G-share companies amounted to RMB367.8 billion, or around 11% of the total share market capitalization.
The share price of the G-share companies performed well during the pilot period from May to August, but since September when the share shift from delisted to listed was implemented in earnest, G-share prices have not been good, in spite of the fact that the G-share companies are reporting better operational results than listed companies where the non-listed state shares dominate.
According to the Shanghai Securities News, the average net profit for the 102 G-share companies for the first half of 2005 was 54% higher than that of all the listed companies. The G-share companies make up only 7% of all listed companies in China, but their aggregate net profit accounts for 19% of the total.
A total of 245 companies, out the total number of 1,400 companies on the Shanghai and Shenzhen stock exchanges, have been earmarked to undergo the shareholding shift to meet G-share status requirements. So far, 102 of them have completed the process, and the remainder are expected to go through it, though no word has been issued on the timing. Regulators have said not all listed companies will undergo the process, but it was reported in state media that when the market capitalization of all G-shares reached 60% of the market capitalization of all the Class A shares, the new IPO shares would all be tradable, a development that is expected to happen in early 2006. The process by which the state-held shares are listed has involved various deals to keep the markets happy, mostly in the form of free compensation shares to existing G-shareholders.
It is a painful process, adding large quantities of extra supply into a market that is seeing little demand due to the long-term disillusionment of individual investors and institutions alike. But everyone is at least now in agreement that the overhang of the non-traded state shares has to be resolved as a precondition to the eventual turnaround that is widely hoped for.
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