Ask the company secretary of a listed firm in Shanghai to nominate the most stressful event in the financial year, and he is likely to say the annual general meeting. Increasingly, the AGM is becoming an organisational challenge and a test of managerial competence.
AGMs of Shanghai Dazhong Taxi, the city's number two taxi company, have attracted a growing number of shareholders over the years. "The management used to fear that shareholders didn't bother to turn up. Now, their AGMs are always packed to the rafters," says Ms Jenny Fu, an analyst with a local broker which tracks the company. "Teas or even packed lunches are provided which lead to increasing cost of the organisation."
The fact that many shareholders have been laid off from work as a consequence of state enterprise reform also means that they can afford the time to turn up to AGMs and put questions to senior managers, says Mr Ju Xinxing, company spokesman for Shanghai Diesel Engine. "Compared with the past, they show much better knowledge about the company's financial status and ask much sharper questions," he adds. "The share price after the AGM becomes the ultimate barometer of shareholder satisfaction – it goes up if they are happy and down if they are not."
The Chinese stock markets in Shanghai and Shenzhen have topped the world league so far this year with indices soaring. In the first six months of 1997, the B-share market in Shanghai grew by 55 per cent while the A-share market rose 75 per cent. These gains have been achieved despite government intervention designed to cool speculative activity.
Some stocks have under-performed the market considerably, having lost the confidence of the investing public. The sheer power exerted by individual shareholders in terms of price movement is beyond the scope of their Western counterparts. In a market where the state is the majority shareholder in all listed companies, individual investors rank on par with institutional investors as minority shareholders.
As the Chinese currency is not freely convertible, some companies have created both A-shares for domestic investors and B-shares for overseas investors shares which in all other respects are identical including equal voting rights.
Because China has no professional fund management companies, the A-share market is dominated by individuals eager to make quick profits.
It is the dearth of investment options which has caused so much money to chase few stocks and has resulted in a severe imbalance between demand and supply. The country's individual bank savings have reached almost Yn6bn (US$723m), five times the combined capitalisation of the two exchanges.
Latest statistics show that there are now 26 million individual investors in China. The hugely inflated share prices therefore bear little resemblance to the underlying fundamentals of a listed company.
The 'institutional' investors in the A-share market are actually ordinary Chinese companies and their prime motivation, like the individual investor, is short-term gain. The absence of fund managers, which tend to hold shares for at least the medium-term, is chiefly responsible for the volatility of the A-share market.
The central government is trying to stabilise matters. In May 1997 it issued a circular stating that companies should not speculate in the stockmarket and all banks should withdraw funds from companies found speculating. Moreover, banks should not become involved at all in the stockmarket and stockbrokers which manipulate the market price will be fined. It is still too early to assess the full impact of these measures.
By contrast, overseas institutional investors dominate the B-share market. Mr Sandy Nairn, director of Templeton in Edinburgh, is just one example. "We are in China for the long term," he says. "Themost important thing for us is the underlying investment, the business the company is in, its future prospect. We look for value for money. If we like it, we will buy it and hold it for at least five years."
The presence of foreign fund managers is a stabilising factor in the B-share market, but it means that all the day-to-day activity is actually created by locals with access to foreign currency. Ironically, while local individual investors are officially excluded from the B-share market, it is here where they are able to flex their muscles.
About three years ago, with the tacit consent of regulators, Chinese broking firms started to stretch the rules by allowing locals with access to foreign currency to trade B-shares which were originally designed for overseas investors. This group of local B-shareholders has since become a formidable force in asserting its rights and voicing discontent about business operations.
Letters of complaint
Shanghai Refrigerator Compressor, one of the blue-chip companies on the Shanghai Stock V change, learned the lesson the hard way. When the board of directors needed to raise some US$20m for an expansion project in late 1994, they first consulted the parent company which represents the state as a majority shareholder. The parent company didn't want to commit more cash, so a rights issue – raising money among existing shareholders – was out of the question. But the parent company did not mind decreasing its holding by admitting new shareholders.
No sooner had the board decided to raise the money through issuing new B-shares than it was bombarded with letters of complaint – all of them from local B-shareholders. One of the letters collected was signed by over 30 people with a combined B-shareholding worth almost US$10m. They protested dilution of earnings as a consequence of the pending issue and complained that the rights of existing shareholders, particularly those of minority shareholders, were not taken seriously.
They also criticised the board ,for thinking only of the state. "If the majority shareholder doesn't want to dish out more cash, we minority shareholders are happy to buy from them," one of the letters said. "Even in the case of a new B-share issue, we existing shareholders are not given any preference."
Written criticism was addressed to the company secretary and also to the China Securities Regulatory Commission (CSRC) and the city mayor. Furthermore, angry locals sent the B-share price to a free-fall for a solid eight months by selling the stock. "It felt like a year really," recalls Mr Zhang Ming, company secretary. of the Shanghai Refrigerator Compressor. "We simply couldn't do anything to push the price above net asset value." According to a rule introduced by the CSRC, new shares have to be priced above net asset value.
It wasn't until February 1996 that the company eventually completed the issue and got the money it desperately needed.
Another blue-chip company, Shanghai Diesel Engine, suffered criticism for want of a dividend and improved profits. In April 1996 the company published its annual report and proposed no dividend for the year. Hundreds of incensed local B-shareholders telephoned, wrote and spoke publicly against the proposal which effectively ranked the investment worse than bank deposits. "I have never experienced this in my entire career as a company, spokesman," says Mr Ju Xinxing. "They demand an explanation for not using the reserves as dividends. It's a real pain."
Within less than a month, 30 per cent of the company's B-share value was wiped off and the selling drove the price down by over 10 per cent below the stock's net asset value.
"This is a typical scene of an emerging market, caused more by illiquidity rather than the inherent power of minority shareholders," says Ms Rosemary Wang, fund manager with Edinburgh-based Martin Currie. If fund managers are convinced of the company's future prospects, they would not be unnerved by such short-term volatility, she says. Instead, they would be eager to pick up a bargain.
"The power of the individual investor shows just how risky the Chinese market could be. In a mature market, individuals pool their funds together and exercise their power through professional management institutions," she adds. Her company is launching a China investment trust among European and American investors who believe in taking .high risks and hoping to reap high rewards in the long term.
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