The Shanghai Stock Exchange has released long-awaited draft changes to stop listed companies from simply halting trade in their shares whenever they get a feeling that the market is going to turn on them.
China is increasingly anxious to attract foreign investment as the rate of growth in the world’s second-largest economy cools, partly as it feels the impact of US tariffs.
The new rules are a major move in a regulatory crackdown on the abuse of what was a common practice that peaked in 2017 and not left serious foreign investors disillusioned but left Chinese mum and dad shareholders out of pocket.
Beijing is struggling to attract foreign banks and financial investment to try and balance out increasing capital outflow pressures. If the new proposals are confirmed, they should dramatically cut the time that shares can be arbitrarily placed in a trading halt.
Fang Xinghai, a vice-chairman of the China Securities Regulatory Commission (CSRC), said China’s financial sector and its capital market, which are more or less shielded by a closed capital account, were failing to connect with the rest of the world.
“Foreign investment accounts for just 2 per cent of the total value of the A-share market … so we need to open it up further,” The South China Morning Post quoted Fang as saying on the domestic broadcaster China Business Network.
Chinese stocks tipped into a bear market this year as relations between Washington and Beijing continued to deteriorate amid a climate of economic confrontation.
The Shanghai Composite has fallen around 20% this year – an unnerving experience for the ordinary Chinese investors that have been coaxed and cajoled by state media to invest in Chinese listed companies.
China’s stock market hit a two-year low in June around the same time that US President Donald Trump escalated trade tensions by flagging further tariffs on Chinese goods.
The entire Shanghai draft rules are available here.
Putting the house in order
The major Chinese exchange has put forward that trading halts for corporate restructuring should last for 10 days tops, with a further option of applying for an extension, with suspensions stretching out to 25 days if necessary for the disclosure of documents or the supply of more information, according to Caixin.
The current rules give companies up to three months for restructuring and that’s where the problems have been festering.
China desperately wants to put a lid on its listed companies putting their shares in a trading halt when the market turns against them.
Such suspensions have often been used by companies as a pretty convenient on/off switch to be hit at leisure whenever any bad news threatens to upset the market.
Such suspensions can drag on until the clouds have lifted, sometimes for months at a time.
The move effectively locks up a shareholders money in stock that they can’t even sell because its no longer even a part of the moving market.
Last year, according to Caixin, shares of 69 Shanghai-listed companies were suspended on average every day.
This represents around 5% of all the companies listed for 2017.
According to Caixin calculations, this number has more recently been whittled down to about 10, or 0.7% of the total, on an average day.
Earlier this month, the CSRC first announced plans to stiffen the rules for share suspensions. These latest draft rules are the next iteration of the CSRC cracking down on the kind of practices that unnerve foreigners and ensure China’s equity markets remain a bit of a wild west for investors.
Chinese regulators and the officials that pressure them are well aware that in August Chinese shares ceded their ranking as the no. 2 stock market in the world to Japan.
While China’s stocks eclipsed Japan in market value almost four years ago to the day, both markets are now worth around $6.1 to $6.2 trillion.
To place that into some context, the US stock market, easily the world’s largest, is valued at around $31 trillion.
Unsurprisingly then the ugly spectacle of what outside investors see as the wholesale abuse of trading suspensions has become a focal point for regulators and is regularly cited as an exemplification of why China’s stock markets have failed to achieve the global legitimacy they have yearned for so long.
During 2015’s market crash, more than half of the companies trading on China’s two stock exchanges halted trading, according to Caixin.
The long march to legitimacy
After a series of rejections, the addition of 226 Chinese A-shares into the widely watched MSCI Emerging Markets Index in June represented years of of toil on the part of Chinese administrators and officials.
Starting in 2014, bids for inclusion from Beijing were rejected three times during MSCI’s annual reviews.
MSCI called out the ease of trading stoppages as a major obstacle for the international acceptance of the Chinese stock exchanges.
According to the draft released on Wednesday, there will be the usual exceptions to the rule – any national strategic projects or confidential military matters will be played by ear.
Trading halts for most other reasons, such as preparing for the transfer of controlling shares, should last no more than two days, with the option of applying for an extension to five days.
In principle, the drafts signal the end of trading halts caused by natural market forces – bankruptcy restructuring for example – although if deemed necessary the company can still apply for one.
The get out of jail free clause
And just in case, Caixin also reports that if the stock exchange or the CSRC agrees that a company’s risks could flow through and significantly impact market order, then the message was: come see us about a suspension.