New year may see ‘kick out, bring in’ approach

The Mainland stock market is seeing none of the Christmas spirit that has taken hold of Chinese cities and its shoppers. The markets fell to its lowest levels in a month when it opened this week.

The usual suspects generating this bear run are: tight year-end liquidity, weak industrial data and ennui with policy measures. Institutional investors are staying on the sidelines as companies close books at the end of the year, causing a drain on liquidity.

Growth momentum has started to weaken and this trend will continue in the first half of 2014. Upcoming interest rate liberalisation is expected to erode profit margins of banks and investors are getting cagey about once-trusted bank stocks.

Limited choice

Given the under-formed nature of the Chinese financial markets, bourse behaviour remains erratic, while local investors are yet to reach the level of maturity seen in advanced markets. Its not as if retail investors are wholly to blame. Investment channels remain very limited for the Chinese, saddled as they are with a pool of poor-quality domestic stocks, gold, expensive real estate or low bank deposit rates.

This partly explains why China’s stock markets continue to see disproportionately high daily turnover, even though they have been the world’s worst performers in the past two years.

It is precisely this malaise which various policy and regulatory bodies are trying to address. The latest buzz is a a ‘kick out’ — ‘bring in’ concept, that is expected to help the markets mature.

Sieve ‘em out

Consider the nature of the stock market participants. The root problem lies in the overall quality of more than 2,000 listed companies in China. Majority of the traded companies regard the stock market as either a capital pool or a private coffer for their executives, who are known to draw cheap funds from the market, either by selling new shares, or converting stakes in companies into personal fortunes. These companies are also stingy about paying dividends to their retail investors.

In order to ‘kick out’ these elements, regulators have been trying to bring in more quality companies. A few years ago, the idea of an international board was mooted so that global, blue-chip companies could list in China. However, considering that the financial sector needed deep reforms, the operation of international board did not take off.

In the absence of an international board to set high standards, the delisting system for companies needs to be strengthened.

As of now, the system focuses solely on the profitability of a company, unlike foreign bourses which follow stringent norms, ranging from revenue scales to environment index. This has resulted in listed companies in China polishing up their annual reporting figures to appear presentable. Thus, without a sound elimination system, the overall quality of China’s stock markets is bound to stagnate.

Mature approach

The second approach towards maturity involves ‘bringing in’ new practices in the new year. For one, the primary over-the-counter (OTC) market is being further opened to ‘qualified’ companies from all over the country, especially to small businesses.

Until now only unlisted companies in high-tech zones in just four cities were eligible to raise funds through the national OTC market, called the National Equities Exchange and Quotations System.

More importantly, the China Securities Regulatory Commission is bringing in major changes in the issue of preferred shares. Under the draft regulations, three types of listed companies can publicly issue preferred shares: Shanghai Stock Exchange 50 index components; companies planning to acquire other listed companies by issuing preferred shares for payment, and companies buying back common stock that plan to decrease their registered capital by issuing preferred shares as payment.

Also, domestic companies that aren’t listed on Chinese exchanges, and Chinese companies listed abroad, can apply for private placements of preferred shares through the National Equities Exchange and Quotations.

— The writer is a freelance journalist based in China