Center

Clarify aims of stock reform

(China Daily)
Updated: 2006-04-15 09:12

A stock market incapable of raising funds for listed companies is flawed. Yet, it is not the goal of the country's share-merger reform to allow listed firms to issue new shares.

The Shanghai Stock Exchange was recently reported to have urged all firms listed on its market to start their own schemes to float once non-tradable State shares by compensating public shareholders. And the deadline is set for the end of June.

Such a call clearly demonstrates a sense of urgency to wrap up the ongoing stock reform, which was kicked off about a year ago to end the split-share structure of domestically listed companies. The existence of non-tradable shares, which account for two-thirds of all Chinese stocks, had long been blamed by many as the root cause of all evils in the country's fledgling stock market.

Till now, more than 60 per cent of the country's 1,300-odd listed companies have initiated share-merger reforms, laying a theoretical condition for the securities authorities to lift the ban on refinancing.

To facilitate the stock reform, the China Securities Regulatory Committee has suspended fundraising activities on the domestic stock markets.

By doing so, the market watchdog both eased liquidity concern to help stabilize the market and used refinancing as a carrot to coax listed companies to take swift action.

In terms of expediting a critical stock reform, this tactic worked well as a stopgap measure.

However, as the reform wraps up, the securities authorities must be careful to distinguish the means of reform from the aims they are supposed to serve.

Efforts to restore the fundraising function of the stock market are needed. In the long run, the domestic stock market needs to expand rapidly to match the development of the Chinese economy.

But at present, listed companies should not be allowed to mistake the share-merger reform as a mere springboard for refinancing.

A common problem for domestically listed firms was their impulse to pool as much money as they could from the market. Due to a lack of credible external supervision, many companies have wrongfully deemed refinancing as a free lunch.

The share-merger reform should be aimed at stopping such wrongdoing to protect the interests of all investors, particularly individual shareholders.

Fundraising is an important way for the stock market to assume its role of resource distribution.

But to realize the stock market's utmost goal of raising the efficiency of the economy, the securities authorities should make sure the current reform sticks to its goals.

Two things matter most in developing a successful stock market: effective supervision by the market regulator and sound corporate governance. Together, they make listed companies more trustworthy.