As the article discussed above, the China Securities Regulatory Commission (CSRC) published a draft regulation of finance tool. Let's first get to the background of this oversupply in the Chinese stock market. When China government first established its own security market, the CSRC set up some non-tradable share in fear of losing the control of some State-owned property. The non-tradable share always takes a large percentage of the whole shares, sometimes even more than 60%. The non-tradable shareholders include shareholders with over 5% non-tradable share and shareholders with less than 5% non-tradable share. The former shareholders are always strategic investors, and the latter are speculators. However, with the development of China capital market, some abuses have been emerged just like the non-tradable share holder doesn't care about the operational performance of the company, sometimes do something jeopardize the company but gain their own profit like impropriate the asset of company. So since the 1998, the China government tried many times to make the non-tradable shares tradable and finally they got a final version for that at 2005. But when the non-tradable begin to trade, too many shares were emerged at the market at a same time, the stock market slumps which shows at the followed picture. The shock index slumps from 6000 to 2424 during seven months and the CSRC just published a new draft about allow shareholders of listed companies to issue exchangeable bonds.
As the spokesman of CSRC said, the exchange bond could help the non-tradable shares could be sold at a much more slow rate than before, remodel the expectation of the market and also the exchange bond could serve as a new financial tool which could reduce the risk and provide more choices for the investor. However, as far as I am concerned, this new exchanged bond could hardly serve as a tool for shore up the market. Firstly, the shareholders with over 5% non tradable share, who could afford the exchange bond trade fee, are always strategy investors. What they want is control the State-owned company and only they need to do is sell few shares of their own to cash in( in addition, the cost of non-tradable shares are always very cheap for they were the product of 2 decade ago, which almost one cents per share). And, almost every shareholders with less than 5% non-tradable shares could not afford the threshold of the standard to publish the exchangeable bonds and even if they could reach the standard, the highly cost of the issuing would stop them to do so.
Even if the non-tradable share holder would follow the plan to issue the so-called exchangeable share, what will happen? An assumption seted by the CSRC is that the share sellers are in trouble get enough money so they want to simply dump their holdings. However, this is even not the truth. Due to the cost of the non-tradable shares and the reality that almost every non-tradable shareholders dumping their holding right at the time when the non-tradable shares could trade legally, it is ridicule to think that so many State-owned property shareholders relapse into financial crisis. The truth is that they all need cash in to earn excess profit.
For the reasons I provide above, I hold a negative view about the new plan and I think it fail catch the essence of this slumps of the Chinese Stock market so it could not serve as a useful tool to shore up the market.
Article drawn from the ChinaDaily:
http://www.chinadaily.com.cn/bizchina/2008-09/06/content_7004705.htm
picture from:
http://finance.sina.com.cn/stock/jsy/20080906/08425279417.shtml
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