New proposals on non-tradable shares under review

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Last updated at: (Beijing Time) Wednesday, November 26, 2003

New proposals on non-tradable shares under review

The Chinese authorities are set to consider new proposals on the transfer of non-tradable shares that favour market-set prices and cater more to the interest of minority shareholders.

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The Chinese authorities are set to consider new proposals on the transfer of non-tradable shares that favour market-set prices and cater more to the interest of minority shareholders.

A report in Economic Observer newspaper said on Monday that the prices of non-tradable State shares to be sold would be based on the net asset value per share, which should be more acceptable to investors.

The report quoted experts with the Development and Research Centre (DRC) of the State Council as saying that the new proposal, which would be adopted by the government after discussions and tried on an experimental basis, asks owners of non-tradable shares to offer discounts during transfer to ordinary investors in the secondary market - at prices much lower than the tradable shares of the same listed company.

Both the China Securities Regulatory Commission (CSRC) and the State-owned Assets Supervision and Administration Commission (SASAC) declined to comment on the report.

Li Rongrong, director of SASAC, said two weeks ago that the authorities had not found a feasible plan to push State-share sell-offs in listed companies. The existing proposals cannot satisfy all parties involved but the government would pursue a practical plan.

"The focus is the pricing," said Zhang Mingxing, a researcher with the State Information Centre. "No matter what the final scheme is, I think it is unavoidable that the government would have to slash the high prices of the State-owned shares to be transferred - as had been tried and failed before - and make them more acceptable to ordinary investors."

In spite of the uncertainty on the issue, the market responded positively to the Monday report, with major stock indices on the upsurge over the past two days, reversing previous downtrends that often followed such State-share sell-down talk.

The new proposal takes into consideration the interests of current investors, said Zhang. For example, as proposed, a listed company would have to organize a general shareholders meeting to get its plan of the State-share sell-down passed.

The pricing system also sounds more positive to investors because they can buy State shares at favourable prices and benefit from a possible rally in the future, said an analyst with China Securities Co.

Due to fears of unreasonable prices and quick market expansion, investors had panicked after China first tried a State-share sell-down two years ago. Stock indices plunged heavily and the authorities had to halt the scheme last June.

As a legacy of the planned economy, about two-thirds of the shares in China's listed companies are still non-tradable, either controlled by the State or institutions.

That has hindered the liquidity of the stock market and skewed the pricing system of the shares, eroding minority shareholders' interests.

If these shares are floated on the secondary market, they would have to stand the test of the market and better reflect the investment value of a listed company, said Zhang.

He predicted that a number of the poor-performing listed companies would withdraw from the bourses or go bankrupt if the non-tradable shares become tradable and subject to market-driven prices; and the reform would push forward the overall performance of listed firms.

But some analysts doubt the feasibility of the new scheme because it means the State or the present owners of the non-tradable shares may have to give in some of their interests.

It would also be inefficient for each listed company to organize shareholders' meetings to decide on the share sale and price, they said.

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