An overview and assessment of the reform of the non‐tradable shares of Chinese state‐owned enterprise A‐share issuers
| DOI | https://doi.org/10.1108/13581980910934036 |
| Pages | 41-56 |
| Published date | 20 February 2009 |
| Date | 20 February 2009 |
| Author | Paul B. McGuinness |
| Subject Matter | Accounting & finance |
An overview and assessment
of the reform of the non-tradable
shares of Chinese state-owned
enterprise A-share issuers
Paul B. McGuinness
Department of Finance, The Business Administration Faculty,
The Chinese University of Hong Kong, Shatin, Hong Kong
Abstract
Purpose – The purpose of this paper is to provide an updated and critical assessment of the share
reforms relevant to Chinese A-share issuers listed in the two mainland markets of Shanghai and
Shenzhen. The reform programme first began in 2005 and has now spread widely across issuers in the
two markets. It is therefore timely to assess how effective the reforms have been as well as gauging the
ongoing effects of the transformation (of non-tradable scrip into tradable form) on A-share prices.
Design/methodology/approach – The “Split Share Structure” reform programme represents a
major policy initiative in China and potentially opens-the-door to large-scale state-share disposals. The
evidence to date however suggests that the Chinese authorities are primarily concerned with the
reconfiguration of the array of share types that presently exist into a more comprehendible, streamlined
form. The various checks and balances imposed on controlling shareholders engaged in the
transformation of their shares from non-tradable to tradable form suggest that eventual re-designation
of the holdings into an unfettered tradable type will not necessarily translate to the state’s acquiescence
in the disposal of such shares. On the contrary, state holdings in the most strategic of assets are likely to
be retained more or less intact. Insights are developed by focusing on examples involving major A-share
issuers. In particular, a case study of the Sinopec reform proposal of August/September 2006 is set out to
help illuminate the principal features of the reform package. Critical examination of the empirical
literature relating to the A-share price effects of the share reform programme also features.
Findings – There is little evidence to date of significant stock disposals amongst the largest and
most strategic of China’s issuers. However, for a number of A-listed issuers, parts of the lock-up
moratoria have already expired or are set to do so in the very near future. Given the precipitous fall in
A-share prices (in Shanghai and Shenzhen) since late 2007, largely wrought by the enveloping global
credit-crunch, the Chinese authorities have an even more compelling case than hitherto to assiduously
dampen fears of large-scale state-share disposals. Notwithstanding this, at least a small part of the
drop in A-share values during 2008 derives from the building risk-premium on this issue.
Research limitations/implications – As the trading moratoria on re-designated shares still
applies in most cases, at least in respect of the majority of domestic stock holdings, a clearer picture
will not emerge until 2009-2011 when all such moratoria would have lapsed.
Originality/value – The discussions in this paper help to bring into focus a highly topical issue
within the context of the Chinese equity market.
Keywords China, Shareholders,Shares, Shareholder value analysis,Government policy
Paper type General review
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The author would like to acknowledge comments from the Guest Editor, for this Special Issue of
The Journal of Financial Regulation and Compliance, Dr Charlie Cai, for his valuable comments
on an earlier draft of this paper.
Reform of the
non-tradable
shares
41
Journal of Financial Regulation and
Compliance
Vol. 17 No. 1, 2009
pp. 41-56
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980910934036
1. Background
This paper provides an assessment of China’s “Split Share Structure” Reform (CSRC,
2005) programme which first began in 2005 and has now spread across virtually all
issuers on its two constituent mainland markets: Shanghai and Shenzhen. The reform
specifically serves to re-designate non-tradable stock, in mainland PRC-incorporated
issuers that already have established A-share listings, into tradable (A-share) form.
At the time of writing, this transformation process is only part-way through given that
most of the non-tradable stock is now “tradable subject to trading restriction”.
The passing of the various moratoria or “lock-up” dates on this newly designated stock
will mark the complete metamorphosis of the originally non-tradable stock into a
tradable form completely unfettered by trading restriction. While brief comment on the
transformation process has already featured in this journal (McGuinness, 2006, pp. 42-3),
the time is ripe for a further look at the reforms, especially as certain parts of the trading
moratoria imposed on such re-configured “restricted” shares have in many cases just
lapsed or are about to do so.
As argued at the outset, this transformation is a creeping or gradual one, but
eventually will entail a huge increase in the supply of tradable A-stock, as the newly
converted stock complements pre-existing tradable A-share floats. The burning
question is what impact will such an increase in tradable float size have on A-share
valuations? To some extent, Chinese A-prices have already impounded the anticipated
effect. However, as shall be argued later in this paper, a building risk premium or
dampening effect is apparent in a number of issuers where lock-up expiry looms.
The nature of such trading moratoria, and the various ways in which the regulatory
powers and controlling shareholders have tried to lessen the building risk premium are
central considerations in the whole share reform programme, and are critically assessed
in the second-half of this paper.
Before focusingthe spotlight on this issue, a briefdiscussion of the nature of the“Split
Share Structure” besetting mainland-PRC incorporated issuers follows in Section 2.
This entails comparison of the two principal stock types: domestic non-tradable stock
(the subject of there-designation exercise) and domestic tradable A-stock. Section 3 then
sets out the keycharacteristics of the share reformprogramme. Specifically, thenature of
the proposals,and the associatedcompensation and votingprivileges extended to existing
tradableA-share investors are scrutinizedand illuminated withinthe context of a detailed
case study. In Section 4, attention focuses on a minority of SOEs that are able to issue
tradableshares not just in A-share form but also in B- (or H-)share form. While in the vast
majority of cases mainland PRC-incorporated issuers only have recourse to tradable
A-shares, a select group of very large and strategic issuers have been meted-out for
concurrent A- andH-share listings. Comment on this specialgroup of issuers is essential,
especially in relation to the ongoing share reformissue. Assessment of recently disclosed
provisions on the permissible methods of share disposal, and the associated disclosure
requirements, for stock transformed from domestic, non-tradable form into tradable
A-share form then features in Section 5. Conclusionslogically follow in Section 6.
2. The “Split Share Structure” of A-listed mainland PRC-incorporated
SOEs: the non-tradable/tradable stock dichotomy
Domestic Chinese mainland shareholders afforded the privilege of share conver sion
under the CSRC’s (2005) “Split Share Structure” reform typically constitute state-related
JFRC
17,1
42
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