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Trial Scheme Scheduled for Nontradable Shares
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Four A-share companies are to float nontradable shares on the local bourse in a pilot trial scheme after China's securities regulators agreed last month to resume selling State shares.

As a result of China's planned economy, about two-thirds of the shares in domestic-listed companies are still nontradable, either held by the State or approved bodies.

This has significantly affected market liquidity and transparency, and disadvantaged tradable shareholders. Regulators have vowed to solve the problem, this pilot trading scheme being one of the possible solutions. Guidelines and regulations relating to the scheme were released on April 29.

The pioneering four companies, all small to medium-sized enterprises (SMEs), are machinery maker, Sany Heavy Industries Co Ltd; computer service provider, Tsinghua Tongfang Co Ltd; packaging materials manufacturer, Shanghai Zi Jiang Enterprise Group Co Ltd; and coal and cement producer, Hebei Jinniu Energy Resources Co Ltd.

All four companies issued circulars on Monday to reveal their intention to gradually float shares on the local bourses.

Share trading in the four companies was suspended on Monday.

The companies are expected to give shares or cash to tradable shareholders as compensation when the nontradable shares are floated.

Regulators have given the companies the leeway to develop their own mechanics of the scheme, the only restriction being to respect the interests of minority shareholders through sufficient disclosure.

According to a fund manager with Dacheng Fund Management Co, who asked not to be named, "The companies that are planning nontradable share sales have to come up with market-oriented proposals that are acceptable to the tradable shareholders. Otherwise it would be hard to get them passed."

Details of the companies' respective plans are expected in the next few days.

"The pace of reform in this area will be determined by the success of this trial scheme, and more companies can be expected to join the scheme in future," said Tian Yi, an analyst with United Securities Co.

However, Tian added that only companies with solid results and a practice of regular information disclosure should be allowed to participate. Further, more blue-chip companies should be encouraged to join.

Although viewed as a major breakthrough, analysts say opinion is split on the trial scheme. Some investors are worried that they might not get sufficient compensation from the State share sell-down, said an analyst with Haitong Securities. But, market rumors about stocks that could be part of the next round of nontradable share sell-offs have sparked active trading.

The short-term impact of the news of the nontradable share flotation is still unclear as regulators will not allow nontradable shares to flood the market, said Dong Chen, an analyst with China Securities.

But, in the long run, the flotation of these shares could push down average price and earnings ratios, and further polarize share prices.

(China Daily May 10, 2005)

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