BIZCHINA / Analysis
Economist criticizes share reform
(China Daily)
Updated: 2005-07-26 14:41
There must, and will, be a big change in the approach towards China's
on-going State share reforms because the experiment is not proving
satisfactory, Liu Jipeng, a Beijing-based economist told China Daily.
One problem is that the pilot firms selected to experiment with the
flotation of non-tradable shares are not representative enough, Liu said.
China has some 1,400 listed firms, which differ from each other greatly
in performance, size, shareholder structure and share types. There should
be at least one representative firm selected from each type so as to form
enough guiding models for all listed firms, according to the economist.
Moreover, most pilot firms chose to compensate tradable shareholders with
more shares in order to float their non-tradable shares. And at the same
time, non-tradable shareholders have promised not to put their shares on
the market for a certain period of time. And even when that period is
over, they will sell their shares section by section in order to ease
market concern over possible share price falls due to market flooding.
This is potentially dangerous and will lead to losses for the two types
of shareholders, Liu said.
Tradable shareholders will try their best to get the biggest possible
compensation. But when they get it, they will rush to sell their shares
for fear the market will be flooded when former non-tradable shares are
put on the market. This stock selling will undoubtedly lead to big price
reductions, he explained.
This can be seen from the behaviour of the first four pilot firms.
Machinery manufacturer Sany Heavy Industries Co Ltd paid three shares and
8 yuan (97 US cents) to its tradable shareholders for every 10 shares
held.
The proposal was well received at the general shareholders' meeting, but
when the compensation was offered the public traders began to dump their
stock.
The company's share price then fell. Its price has fallen by about 15 per
cent from the beginning of the compensation period.
Other firms in the first batch of reforming firms suffered from almost
the same problem.
Meanwhile, using new financial derivatives, such as warrants and options,
which did not exist before as tools to solve the share structure problem,
is not a good idea, Liu said.
"This will complicate the reforms and bring more market risks to
investors."
The approach to solve the problem should be simple and practical, he said.
The economist also suggested setting a baseline price for non-tradable
shares.
Only when the market price is above the baseline, which will be set at a
high level, will non-tradable shareholders be able to put their shares on
the market.
In this way, non-tradable shareholders' interests are linked to the
market price, and they have to try their best to improve the company's
performance by asset restructuring, governance improvements and using
other methods.
Using this system both sides can benefit.
About two-thirds of China's shares are non-tradable and held by State or
legal bodies, a throwback to the planned economy.
(For more biz stories, please visit Industry Updates)
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