Anthony Neoh talks Mainland bourses and regulation

In the first of a two part discussion, the CSRC''s special advisor discusses China''s plans for a third domestic board to house de-listed SOE''s.
Having introduced a de-listing mechanism earlier this year, the CSRC's (Chinese Securities Regulatory Commission) plans for a third board may signal its intention to accelerate the pace of de-listings among the predominantly loss-making state-owned sector.

De-listed companies could receive a new lease of life by being listed on a separate board, the so-called third board, says Neoh.

"There are numerous supervisory and disclosure issues," he comments, "but something has to be worked out as shareholders of de-listed companies have a right to transfer their shares in an orderly manner, be it through sale and purchase, gift or succession.

"For example, securities firms could host an over-the-counter-market for an individual de-listed stock under the supervision of the CSRC."

So far, however, only electrical home appliance maker Shanghai Narcissus Electric appliance has been de-listed this April. Neoh further says that no date has actually been set for the launch of a third board, with the CSRC still evaluating different possibilities that have also yet to be put onto the agenda of either the Standing Committee or Legislative Affairs Commission of the NPC.

In the 11 year history of the Mainland's stock markets, SOE's (State-Owned Enterprises) have raised $48 billion and made it extremely hard for privately listed companies to compete for funds. The latter make up only 5% of the 1,085 companies listed on the Shanghai and Shenzhen bourses and often find themselves at the bottom of a 500 strong queue of state-owned companies undergoing restructuring prior to listing.

Many of the SOE's listed on the Shanghai and Shenzhen boards are generally turning a loss even with massive state support. During 2000, less than 10% of listed companies paid their taxes in full, while 10% were exempt from all taxes. 

For listed firms that went public before the 1994, the average return on net assets has slid from 14.6% in 1994 to 2.4% by 1999, according to official statistics.

In spite of these losses, not a single listed state-owned company has declared bankruptcy, and serious pressure for reform, such as the prospect of a take-over by a rival firm, is non-existent since the government holds on average a two-thirds stake in SOE's. By law, these state-held shares are not allowed to be sold to another party, thereby making a take-over almost impossible.

Rather than declare bankruptcy, loss-making firms are put into special categories; PT (Particular Treatment for firms that have been in the red for three years, and ST (Special Treatment for companies that have made losses for just two years). PT and ST stocks are only traded on Fridays and are limited to 5% share-price movements up or down, but sometimes experience huge run ups as investors speculate they will most likely to be bailed out by the government. 

Until the beginning of the summer, the Mainland bourses were suffering excessive liquidity, which led p/e ratios to average multiples of well over 60 in Shenzhen and 40 in Shanghai. Most of this performance has been attributed to companies illegally investing primary market proceeds directly into the secondary markets and fund flows from banks that are legally barred from investing bank deposits.

At present, Neoh says that the CSRC finds it difficult to investigate fund flows through the banking system because of confidentiality protection given to bank clients by the Commercial Banking Law.

“The securities Law allows the CSRC to look at fund accounts, but the banking sector has generally regarded this to cover funds accounts in securities firms only,” he explains.

"The Central Bank is assisting the CSRC on a case by case basis," he continues, “and progress is slow."

Yet Neoh concludes that new judicial interpretation and amendments to the Securities Law will help the CSRC to act with more vigour. At the moment, for instance, the CSRC does not have the power to freeze assets, preserve evidence, or prevent the flight of assets.

Setting out new rules of court to cover all three issues would represent a great leap forward in terms of regulatory oversight. “The Supreme Court has a project on judicial interpretation of the Securities Law,” Neoh concludes. “They will probably complete it early next year.”