Foreign investors seek reform of China stock suspensions

By: | Published: July 17, 2015 1:59 PM

Foreign investors have called on Chinese regulators to review the mechanism that allowed more than half its listed companies to halt trading in their shares during the recent market crash, trapping investors as prices tumbled.

Foreign investors have called on Chinese regulators to review the mechanism that allowed more than half its listed companies to halt trading in their shares during the recent market crash, trapping investors as prices tumbled.

As China’s stock markets dropped 30 percent in less than a month, around 1,500 companies listed in Shanghai and Shenzhen suspended their stocks, many citing reasons that would not typically require a trading halt or were not borne out by their subsequent actions.

As markets stabilised, more than half the suspended companies resumed trading.

The suspensions reduced liquidity in stock portfolios and exchange-traded funds, forcing some to suspend redemptions and making it difficult for banks to value derivatives based on mainland shares, known as “A” shares.

“We hope that after each and every situation like this, people do go over the rules and make improvements to make the market as investible as possible,” said Rodney Comegys, head of investments Asia Pacific at Vanguard.

Investors said a review of suspension rules was key if China hopes to be included in index compiler MSCI’s key Emerging Markets Index, which could bring in big flows of cash from foreign institutions.

“One of the issues (MSCI) may look closely at is shares suspension,” said Jack Lee, head of China A-shares research at global investment firm Schroders in Hong Kong.

“This incident shows there is room for improving the share suspension mechanism,” he said, noting that these were voluntary actions by listed companies.

MSCI declined to comment.

FTSE Russell, another index compiler, will look at share suspensions as part of its A share review, said an individual familiar with its thinking.

Rules published on the Shanghai and Shenzhen exchange websites outline a range of circumstances in which companies should request share suspensions, none of which include a market-wide sell-off. However, the rules afford exchange officers a high degree of discretion to grant suspensions, said one analyst.

A Reuters analysis of 100 companies shows nearly three-quarters requested a trading halt due to “significant matters” such as deals or asset restructurings, though 30 resumed trading without completing a transaction.

The rest cited the creation of employee stock ownership plans (ESOP) or management incentive schemes, an event that does not explicitly require a suspension under China’s exchange rules, or in markets such as Hong Kong or London. Half failed to complete the plan.

“Many companies aggressively pursued suspensions under the guise of supposedly establishing ESOP plans and other ownership-related matters, to avoid their share price from plunging,” said one Shanghai analyst.

The Shanghai Stock Exchange, Shenzhen Stock Exchange and China Securities Regulatory Commission did not respond to requests for comment.

Anthony Wong, A-shares portfolio manager at Allianz Global Investors, said inadequate compliance with existing rules was the real problem.

“The CSRC already has rules and regulations in place to govern stock suspensions. It would be ideal if the rules and regulations are strictly adhered to,” he said.

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