Published August 25, 2008

China moves to ease pressure on stocks

Broking firms can be underwriters after 'lock-up' period

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(SHANGHAI) Chinese authorities, seeking to reduce downward pressure on the stock market, said that institutions would be allowed to use brokerages as underwriters when selling shares made tradable by the expiry of lock-up periods.
Time out: Tens of billions of dollars worth of stocks will become tradable with the expiry of lock-up periods related to IPOs and reform of state shareholding structures

Tens of billions of dollars worth of Chinese stocks will become newly tradable this year and next with the expiry of lock-up periods related to initial public offers and reform of state shareholding structures.

The threat of this extra supply is a major factor which has pushed the Shanghai Composite Index to a 20-month low this month, down more than 60 per cent since last October.

Under a plan reported by official business newspapers on Saturday, the China Securities Regulatory Commission said that institutional investors would be permitted to sell such shares through offers underwritten by brokerages.

A price consultation process conducted by the brokerages would ensure fair pricing of the shares, and the offers would distribute large blocks of shares among a wide range of buyers, reducing the impact on the market, an unnamed commission official was quoted as saying.

The China Securities Journal quoted the official as saying that a detailed proposal for the scheme would be announced very soon. The commission does not aim to prevent institutions from selling shares or increasing their costs in doing so, he said.

'We have no intention to block sales,' the official was quoted as saying. 'That would be retrograde thinking.'

The commission has also said that it is considering the use of bonds exchangeable into stocks to ease the impact of newly tradable shares coming onto the market.

In April, the commission began requiring institutions intending to sell more than one per cent of a listed company over one month to use an off-market trading system.

Since then, there have been only five violations of the rule, which have been penalised with steps such as asking the seller to deposit part of the profit earned by the sale at the listed firm in the form of shareholders' funds, the official said.

In another effort to support the stock market, the commission said on Saturday that it would press listed companies to adopt more transparent and generous dividend policies.

Under draft rules which were published for public consultation by major newspapers on Saturday, the China Securities Regulatory Commission said that firms which did not pay out cash dividends would have to explain why in their annual reports.

They would also be required to disclose in detail how they planned to use cash retained by omitting dividend payments.

Only companies that had paid out at least 30 per cent of profit attributable to shareholders during the past three years, in the form of cash or stock dividends, would be eligible to sell additional shares or bonds. Currently, the ratio is 20 per cent.

Listed companies would also be allowed to pay dividends on a six-month basis, rather than only at the end of each fiscal year.

'Giving fair returns to shareholders is part of listed firms' responsibilities and is the foundation of stable and healthy development of the securities market,' the regulator said.

'We've noticed that some listed companies lack continuous and steady long-term dividend systems, and execution of such policies is not transparent enough.'

The Shanghai Composite Index is down more than 60 per cent from last October's peak and near a 20-month low. -- Reuters