Chinese Government Adds New Rules For Reporting
Of Guangu Transactions
In an effort to add a level of transparency to shares
held by state-owned enterprises in China, the Chinese
government has required that all transactions of shares
not openly traded on the Shanghai and Shenzhen stock
exchange be reported.
While the number of shares and parties by state-owned
enterprises will be reported, the per share price will
not be publicly reported. This important shortcoming
will still make it difficult to put a market value on
a company. It is likely that the new measure is a first
step, with disclosure to share price to follow at a later
date.
While China has two major stock exchanges in Shanghai
and Shenzhen, the performance of listed Chinese companies
has not reflected the growth of the Chinese economy,
which has forced many Chinese companies to seek overseas
listings. The main reason for this is the failure of
the government to address the guangu issue. Guangu are
shares held by other state-owned enterprises. Because
the size of the public float is small for most Chinese
companies, and the number of shares held by other state-owned
enterprises has not been publicly disclosed, Chinese
retail investors have been unwilling to buy and sell
in most companies, resulting in low volumes in the two
major markets.
Failure to disclose the size of the guangu holdings
has been the major cause of weakness. The result has
been increasing weakness by state-owned enterprises,
while new private businesses have risen to take market
share from the older SOEs.
Chinese government bureaucrats and bureaucrats in state-owned
enterprises have not been willing to take on the problem.
Many western companies have been willing to arrange purchases
of NPLs (non-performing loans), but Chinese officials
have been reluctant to sign papers authorizing the sale
of state-owned property at low prices. The result has
been paralysis, and in some cases, western firms have pulled
out of China in frustration.
Another reason for Chinese government inaction is fear
of a replay of the "Russian scenario", where
a few well-connected individuals, with the aid of western
bankers, were able to acquire state-owned assets at fire-sale
prices, and transfer most of the funds out to Swiss and
Cypriot accounts. In the case of Yukos,
the former CEO of the company used his funds to further
his own political ambitions.
These challenges have made the issue of corporate
governance popular in government circles, and among
Chinese retail investors.
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