China Focus: China set to solve major problem facing stock markets

The Shanghai Composite Index and Shenzhen Component Index climbed up to 1,248.20 points and 3,371. 49 points respectively on Wednesday, up 2.35 and 1.8 percent.

The jump was caused by the news in an unexpected press release issued by the China Securities Regulatory Commission (CSRC) Tuesday evening in which an unnamed deputy chairman of the CSRC said it was time to carry out pilot projects to solve the problem of state-owned shares of listed firms (the split share structure) on the condition that the legitimate interests of minority stock holders are protected.

The split share structure, left over from China's planned economy, refers to the existence of a large volume of non-tradable state and corporate shares and the fact that only about one-third of the shares in domestically listed companies are floated on the market.

At the Minzu Stock Trading Hall in Beijing, Yang Jianjun, a shareholder for years, told Xinhua he was very "excited" to hear this news. "It shows that the government has paid attention to the voice of minority stock holders, and is determined to solve the problems facing stock markets."

While Wu Renliang, also a shareholder, said the most important thing for splitting share structure is the price of shares. "The interest of minority stock holders should be protected, so the price cannot be set too high."

At the same time, he said, the CSRC should select companies with good performance as pilot projects.

An on-line poll by sina.com, a popular Chinese web portal, Tuesday evening showed that 34.03 percent of voters think China's stock index will slump while 33.22 percent think it will rise.

Experts say this is not strange, since the split share structure has haunted China's stock market since it was born in 1992.

The coexistence of tradable and non-tradable shares has led to many problems, as big shareholders have cornered large amounts of money or embezzled assets. The split share structure has been considered as an obstacle of improving the stock market in China.

Though the CSRC said carrying out pilot projects was "good news, " the fact that it did not give details of how to carry out makes things uncertain. For the CSRC, it is a great challenge to produce a plan to satisfy all sides.

Wang Guogang, deputy director of financial institute of China Academy of Social Science, said it was very difficult to make all shares float.

China has issued no more than 17 billion shares a year since 1992. But now, if the CSRD put the 800 billion non-tradable shares on the market, it would take a long time for them to be sold, Wang said.

At the same time, the situation of the 1,300 listed companies cannot be the same. "If the reform is carried out without basic principles, it cannot be successful."

He said the CSRC should make some principles, and listed companies can make their own plan according to the principles.

Basic principles, as Wang suggested, should include the following: First, big share holders should not loot profits from minority holders. Second, the state should reduce its shares so that it is no longer the biggest share holder. Third, the reform must be done in line with practical interest pattern. Fourth, the shares that the state sells should go on the market.

Yang Sheng, an analyst with skyone.com.cn, a securities website, said the interests of tradable and non-tradable share holders are involved in the split share structure. Since the state holds most of the non-tradable shares, the interest of the government is also involved.

Yang said different sides have different demands during the reform, but at the same time he urged them to compromise and seek a balance "for the sake of a better future."

Chen Li, a researcher with the Shenyin and Wanguo Securities Research Institute, said it is practical for the CSRC to carry out pilot projects considering the reform process of the reform of state assets systems.

Since the split share structure is a crucial step for the reform of stock market in China, Hu Ruyin, director of the research center of Shanghai Securities Exchange, said carrying out pilot projects should be transparent and fair.

The vice chairman of the CSRC also answered questions such as improving the performance of listed companies, preventing and defusing risks of securities companies.

Experts say the above problems have affected the healthy development of China's stock market and the confidence of investors for years. As the CSRC puts them on the agenda, people may think the glum market will disperse cloudy.

The Chinese stock market was established in early 1990s after China began its transition from a planned economy to a socialist market economy in a bid to create a channel for the country's dominant state-owned firms to raise capital.

But the country's millions of investors have suffered heavy losses on the stock markets in the market's four-year slump. The fall was triggered by the plan made public in 2001 by the Ministry of Finance to sell shares from some state-owned firms to raise capital for the country's social security fund.

The ministry soon shelved the plan after the market responded by dumping shares in a panic. The irrational structure, however, puts public investors in a worse position than the actual controllers of the listed companies.

Source: Xinhua