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Copyright 2005 The Financial Times Limited
Financial Times (London, England)

August 25, 2005 Thursday
Asia Edition 1

SECTION: ASIA-PACIFIC; Pg. 2

LENGTH: 676 words

HEADLINE: China commits to market overhaul SHAREHOLDER REFORMS:

BYLINE: By GEOFF DYER and FRANCESCO GUERRERA

DATELINE: SHANGHAI and HONG KONG

BODY:


Shang Fulin, the head of China's capital markets regulator, continued to show a deft political touch yesterday with the announcement that his plan to overhaul the stock market would continue full-steam ahead.

The statement from five government departments commits China to reforming the shareholder structure of all its 1,400 listed companies while leaving the tricky questions - in this case, compensation for Hong-Kong-based investors - for other people to decide.

The unwieldy structure of China's stock market has been a problem the authorities have been trying to deal with for several years. Regulators have long recognised that the fact that two thirds of the shares in listed companies are not actually traded contributes to regular abuses of minority shareholders and depresses equity prices.

Yet all previous attempts to resolve the issue have ended in defeat for the China Securities Regulatory Commission when the stock market slumped this year because of investor concerns about a flood of new shares on the stock exchange.

After launching a pilot programme allowing 46 companies to make all their shares tradeable, the CSRC has extended the scheme to the rest of the stock market.

Many details are still unclear but getting this far is an achievement for Mr Shang, whose tenure at the CSRC had been criticised for inaction until earlier this year. "The plan is a pragmatic response to certain interests in the market that would otherwise not have been willing to support the scheme," says Stephen Green, economist at Standard Chartered in Shanghai.

The main method of overcoming investor resistance has been a compensation plan. All but one of the companies in the pilot have offered new shares to holders of the tradeable stock to assuage their concerns.

This idea has come in for considerable criticism. Weijian Shan, a venture capitalist who is on the board of Baosteel, said the compensation plans were unconstitutional because they gave taxpayers' money to investors. Others have said they are another government effort to rig market sentiment.

But Mr Shang has fallen back on two responses. First, he says the offers of new shares are a decision of individual companies, not government edict. And rather than using the term compensation, he has described them as a fee for changing the terms of the companies' initial public offering prospectuses, which said the non-tradeable shares would not be listed.

Now Mr Shang has used a similar tactic to avoid another thorny issue - whether companies that have listed in Hong Kong and on the mainland should compensate overseas investors.

Holders of so-called H-shares have argued they should receive the same treatment as other classes of investors. However, the subject has been highly controversial because it would involve giving public funds to foreign investors.

One government official says there should be no compensation for H-shareholders because the listing circulars in Hong Kong - unlike those on the Shanghai exchange - made no commitment not to change the status of the non-tradeable shares. "There was no such agreement about the non-tradeable shares in Hong Kong," he says.

The CSRC solution to the dispute? Each company is to decide its own policy, says Mr Shang. Analysts say the result of this diplomatic answer is that no companies will compensate their H-shareholders but allows Mr Shang to avoid saying so.

While Mr Shang's fudges may have upset many observers who feel market principles are being abused, his reform plan has also created a level of confidence among some investors that has not been seen for several years.

After reaching an eight-year low two months ago, the Shanghai composite index has recovered some ground and a few investors believe that with the reform plan in place, the market has turned a corner.

"Investors have been discounting the increase in the supply (of shares) for years," says Frank Gong, head of China research at JPMorgan. "They now know what the solution will be and can focus on the fact that it will put the market on a much healthier footing."

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