China to Further Stock Market Reform, Improve ROI: Top Regulator, Expert
China will follow through with the reform of its ailing stock market by reshaping equity structure, improving listed firms' results and improving regulation to boost ROI.
China will follow through with its reform of the nation's ailing stock market by reshaping equity structure, improving listed companies' results and improving regulation in order to boost the return on investment (ROI) in Chinese companies.
Over the past few years, the trend in China's stock market has been totally at variance from the nation's general macro-economic trend. Since 2001, while China's economy has grown at an annualized pace of 9%, its key stock indexes have plunged dramatically. The Shanghai index, for example, fell to around 1,200 points from over 2,200 during this period. This has led to the majority of public investors suffering losses in their investments.
According to official statistics from the China Securities Regulatory Commission (CSRC), over one third of China's listed firms had completed their share swap scheme by the end of January this year.
The ongoing share swap scheme, initiated by CSRC, is aimed at reforming the equity structure of listed companies. Under the scheme, the substantial shareholders of listed companies, most of whom are state-owned enterprises or the government itself, offer public investors shares pro rata to the latter's shareholdings in the companies. These shares from the substantial shareholders are offered in exchange for liquidity of hitherto nontradable shares held by them on the market.
However, some influential economists hold that the share swap scheme, though a crucial step toward improving the market situation, only suffices to address the liquidity of all shares floating on the market, and that the more important measure is to improve the listed companies' performance and their operating results.
"To improve listed companies' results is the ultimate cure for China's stock market and also essential to protecting the legitimate rights and interests of public investors, who should be able enjoy reasonable ROI from their portfolio... Openess , fariness, and equality on the market should be safeguarded,", comments Cheng Siwei, a renowned Chinese economist.
Cheng Siwei joined a number of top economists and high-profile regulators at a conference recently in Beijing, where a number of concerns were expressed about the ongoing reform of the nation's stock market.
Cheng told the meeting that two issues should be addressed to achieve the goal of share market reform: on one hand, further action should be taken to improve corporate governance and operating results; on the other hand, certain companies mired in poor performance should be delisted to give way to those better performing companies who are aiming at the equity market.
On another front, tightening regulation of the market and of the behaviour of listed companies is also seen as key to the reform. In the past, thanks to inadequacy or even dearth of regulation and monitoring, it was not uncommon to find that listed companies published falsified financial information, manipulated their stock prices and that substantial shareholders embezzled the companies' assets. Investors' confidence has been impaired as those violating the law were not able to be punished due to loopholes in the existing laws and regulations or the inadequate enforcement of such legislation.
At another recent meeting, Shang Fulin, the Chairman of CSRC said that China will improve regulation and monitoring of the stock market.
He said, " We must push for an overhaul of securities dealers and an improvement of listed companies' performance, while carrying out the share swap scheme. We should shake up our mindset about regulating the market, sharpen our enforcement, and upgrade the rules to bolster a healthy market."
The reform of the stock market that began last April has, however, already led to a remarkable increase in investor confidence.
He Xu, an analyst from Zhongshan Securities says " 2006 will be the year where we will reap on the stock market. This year the dip in stock prices of the past four straight years will end."
Many foreign institutional investors are also joining China's domestic investors in upping the pace of their investments in the nation's recovering equity market. Morgan Stanley, the Goldman Sachs Group and Deutsche Bank, among other big names in the investing community, have added Chinese companies' shares to their portfolios.
So far over 10 billion US dollars has been channeled by QFIIs (qualified foreign institutional investors) into the Chinese stock market. Their play on the market will no doubt increase the confidence of investors who actually expect a bullish 2006.
(by Hank Wang; Photo: Baidu; Shang Fulin, top regulator of China's securities industry.)
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