China Market Reforms Advance, More Privatizations in Pipeline

By Maria Trombly | Securities Industry News | October 26, 2005

The biggest problem facing China's stock market today is the fact that two-thirds of all shares are locked up in government hands. "If two-thirds of the shares cannot be circulated, then there is no pressure on the management," said Thomas Liu, professor of finance at Shanghai's Jiao Tong University. "They're not afraid of being run out."

As a result, the long arm of the state stifles even publicly listed companies and they do no operate according to market principles, said Liu. This creates corporate governance problems and explains why China's stock market has been declining for four consecutive years, even as the economy has been booming.

Under new reforms, state-owned shares will be converted to publicly tradable shares in a three-year, phased process (Securities Industry News, May 9). China's Minsheng Banking Corp., the first bank to join the share-conversion program, says that it has received government approval to convert its state interest to publicly tradable shares.

Minsheng, China's second-largest domestically listed lender, plans to also list on the Hong Kong Stock Exchange next year. "We received approval from the China Banking Regulatory Commission on Oct. 12 to go ahead with the plan," the bank said in a statement.

Existing shareholders must approve the conversion plan. Since any sell-off of state-owned shares could lower stock prices, Minsheng sweetened the deal: Existing shareholders will get three additional shares for every ten they currently hold.

Additional coverage of China's share-conversion plan will appear in the Oct. 31 issue of Securities Industry News.