Video #14 - China: State Stock Shares
Tuesday, January 10, 2006BACKGROUND INFORMATION
On June 12, 2001, China's State Council first announced the sale of state-owned shares in Chinese companies. The announcement read: "a joint stock company in which the state holds an interest shall, when conducting an initial or secondary offering to the public, arrange for part of the existing state-owned shares (equal to 10% of the total offered new shares) to be sold as part of the offering. The proceeds from the offer for sale will be contributed to national social security funds."
Under these regulation, incorporated companies in the People's Republic of China (PRC) issued two types of shares: tradeable shares (A, B, and H shares) which were traded on domestic or overseas stock exchanges; and non-tradeable shares. The latter include shares owned directly by the state and legal person shares, which are owned by state-owned enterprises. More than 70% of the total issued shares of a PRC incorporated listed company were non-tradeable shares.
Non-tradeable state-owned shares could only be transferred by agreement between state-owned enterprises or from a government authority to state-owned enterprise. According to the terms originally announced, "such shares can be sold to the general public as long as the listed company conducts a public offering, whether initially or in the secondary market." According to Celia Lam and Wei Jie of FinanceAsia.com, ...some of the state-owned shares could be sold at market price, which was intended to be the same as the price of the new shares offered under the initial public or secondary offering. However, this market price was much higher than the previous 'market-perceived" value for the state- owned shares... so the forced inflow of "lower-valued" stock into the securities market resulted in the dilution of the value of the entire stock market. As a result of this infusion of shares, the Shanghai Comprehensive Component Index fell by 32%-- a market depreciation of nearly RMB600 billion by October, 2001-- leading the China Securities Regulatory Commission to suspend the sale of state-owned shares on the domestic securities market.
There was also indirect impact. The trading volume on the secondary market shrank at the same time that the market fell, thus affecting the securities industry. Some securities companies were "driven into the red"-- and banks were then unable to restructure or raise funds to recover non-performing loans. Additionally, as individuals placed their money in savings rather than investing in the stock market, banks had a heavier interest burden. And because the insurance industry invests in the securities market, the plummeting stock market decreased its income from investments .
On June 23, 2002, the State Council announced its decision to drop the original formula for the sale of state-owned shares.
Two reasons were given:
- "It is difficult for the relevant government authorities to formulate an appropriate scheme for the sale of State-owned shares that could be systematic and widely accepted;
- One of the main objectives for the sale of State-owned shares is to raise social security funds. The deposits in the national social security fund have reached a sufficient level not to require injection of significant amount of cash each year. Hence, it is not necessary to raise further funds through the sale of State-owned shares on the domestic securities market."
These new measures only affect China's domestic market. According to Celia Lam, "if a PRC incorporated company conducts an offering in an overseas market, the 10% sale of State-Owned shares rule will continue to apply." In April of 2002, PetroChina followed this procedure on sales on the New York Stock Exchange and the Hong Kong Stock Exchange. Part of the offering, existing State-owned shares (equal to 10% of the total offered new shares) were sold to the public and the net proceeds of the sale of existing State-owned shares were contributed to the social security funds.
Experts claim that such measures may cause difficulty in structuring an offering. Since state-owned shares are not freely transferable, it would be hard to structure an offering which is part exchangeable bond and part convertible bond.
Asia Pacific Bulletin reported that the Petro-China sale brought US$200-300 billion of capital into China's coffers. Nevertheless, it opines that abandoning these state stock sales at home increased local investor confidence in the domestic stock market. The important point seems to be that the Chinese government is trying to restructure economically-and in doing so, has responded to the needs of the stock market.
SOURCES
Anonymous, "China Listens to the Market and Cancels Sale of State Holdings." Asia Pacific Bulletin, June 28, 2002. Lam, Celia and Wei Jie, "China's State-owned share dilemma." FinanceAsia.com, October 8, 2002.
LESSON PLAN
GRADE LEVEL/SUBJECT:
10-12 grade Economics, International Relations, World History, Geography, International Baccalaureate Programs (IB), Current Events.
PURPOSE:
To present activities to be used in a variety of classroom situations in order to enhance student understanding of the Asian economy and its significance globally.
OBJECTIVES:
Students will be able to:
- Describe the workings of the stock market in the People's Republic of China.
- Establish a time-line of events showing modifications in the economy of the PRC.
- Speculate on the effect that membership in the World Trade Organization may have on the economic policies of the PRC.
MATERIALS:
- Background information provided.
- Resources on People's Republic of China available at your school's Media Center and the Public Library System in your area.
- Background information available through Internet "search engines."
- www.chinapages.com
ACTIVITIES:
May be assigned as group activities or as individual tasks. They may also be designed as preparation for related presentations either by individuals or groups.
- Use charts and graphs to describe the Chinese stock market.
- Create a timeline of events showing how the PRC has modified its economy in recent years.
- Write an editorial expressing your opinion on the effect that membership in the World Trade Organization may have on the Chinese economy.
EVALUATION:
Individual assignments should be graded by the teacher using established criteria. Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale:
Content 1 = Superior (A) Creativity 2 = Excellent (B) Clarity 3 = Good (C) 4 = Fair (D) 5 = Poor (F)
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