On April 29, 2005, four companies – Tsinghua Tongfang, Hebei Jinniu Energy Resources, Shanghai Zijiang Enterprise Group, and Sany Heavy Industries – began a process that would radically alter the structure of China’s A-share market. They were the first batch of companies to begin making previously non-tradable shares, which as of December 2004 still comprised 64% of total shares, freely tradable.
Previous attempts to address the non-tradable share issue had faltered but this time the initiative gathered momentum. The process was quickly widened, and by December 2006, 96% of listed companies had officially completed the reform.
The process was designed to avoid flooding the market with newly tradable shares: Affected shares would be released gradually on to the market over a three-year period. Overall, it has been seen as a positive step on the way to a robust market system.
"The reform is a good improvement in the long-run for the securities market," said Martin Wang, head securities analyst at China Chengxin International, a ratings agency. "It can’t be stopped or drawn back."
However, barely three years after the completion of the reform, the China Securities Regulatory Commission (CSRC) is trying to do just that in a disappointing, if not unexpected, bid to direct the market.
"The CSRC came through with its true colors. As soon as the shares started to become all tradable, they then slapped on further restrictions," said Fraser Howie, the author of a book on China’s A-share market.
Those restrictions have meant that despite claims that the reform has been completed, large hurdles stand in the way of the reform’s ostensible goal of a fully tradable market.
Changing the rules
According to rules introduced in 2007, shareholders holding more than 5% of a company’s previously locked shares – typically government shareholders – must apply to the State-owned Assets Supervision and Administration Commission (SASAC) for approval before transferring shares. A source with ties to the regulators said SASAC would be unlikely to approve such transfers given its goal of propping up the market.
The CSRC further complicated matters in April 2008, when it announced that listed companies could only sell holdings of less than 1% through block trades – privately negotiated wholesale transactions – in an attempt to reduce selling pressures.
Beijing’s actions in buying up tradable shares have also revealed a reluctance to allow market pricing mechanisms to assert themselves. Efforts such as the US$175 million investment by Central Huijin, a subsidiary of China’s sovereign wealth fund, in state-owned banks have proved largely futile in propping up valuations.
In a presentation given in 2007, Qi Bin, the director of the Research Center at the CSRC cited a series of problems caused by non-tradable shares in justifying the reform. In addition to distorting pricing mechanisms, he noted non-tradable shares hindered effective corporate governance and created market uncertainty.
Qi declined to comment when contacted by CHINA ECONOMIC REVIEW, but the reasons for effective completion of the reform process have changed little.
"We’ve not moved forward in three years, and all the hope of the share reform has basically been dashed," said Howie.