What is split share structure and split share reform?

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What is the split share structure(股权分置改革）?

Not all the shares in a company incorporated in China that are listed on a stock exchange are freely tradable. The split share structure of the Chinese public securities market refers to the existence of a large amount of non-tradable shares, including state-owned shares and legal person shares of a listed Chinese company. Only about one-third of the shares in a listed Chinese company are freely tradable.

What are the different types of tradable shares?

The freely tradable shares in a listed Chinese company fall into 3 categories:

A-shares

A-shares are shares in companies incorporated in China that are listed on the Chinese A-shares market for trading among Chinese citizens and Qualified Foreign Institutional Investors (QFII) (合格境外机构投资者). A-shares are quoted in RMB.

Examples of QFII as approved by the State Administration of Foreign Exchange (SAFE) (国家外汇管理局) include UBS Warburg Ltd. (瑞士银行有限公司), CitiGroup Global Market Ltd. (花旗环球金融有限公司), Morgan Stanley (摩根士丹利国际有限公司), Deutsche Bank (德意志银行), Goldman Sachs Group Inc. (高盛公司), Merrill Lynch (美林国际), BNP Paribas (法国巴黎银行).

B-shares

B shares are shares in companies incorporated in China that are listed on the Chinese B-shares market for trading among foreigners who are not QFII. Since March 2001, mainlanders may also trade B-shares with legal foreign currency accounts. B-shares are quoted in USD.

H-shares

H shares are shares in companies incorporated in China that are listed on the Hong Kong Stock Exchange and are freely tradable by any person. (The Hong Kong capital market does not have a split share structure.) H-shares are quoted in HKD.

Inherent problem of the split share structure

The existence of a large amount of non-tradable shares and the trading of different types of shares on separate markets distort market pricing mechanism and lower the efficiency of resource allocation. For example, B-shares are usually traded at lower prices than A-shares because B-shares have a relatively more limited market accessibility. The non-tradable shares and lower priced B-shares therefore create an “overhang” on the prices of A-shares.

The split share reform

The China Securities Regulatory Commission in 2005 published the Guidance Notes on the Split Share Structure Reform of Listed Companies. Led by the State Council, “the split share structure problem shall be dealt with in a dynamic and prudent manner.”

The reform is designed to float the non-tradable legal person shares through the open market. Such legal person shares could, under the reform program, be converted to tradable A-shares. The converted A-shares are subject to a lockup period.

Further, under the Measures for Strategic Investment by Foreign Investors upon Listed Companies which came into force on January 1, 2006, non-QFII may acquire A-shares but only if such acquisition amounts to not less than 10% of the target company. The acquired A-shares are subject to a lock-up period of three years.

Compensation programs are also being introduced by offering tradable shareholders bonus shares or cash.

Conclusion

The split share structure of the Chinese capital market is inherently problematic due to the existence of a large amount of non-tradable shares. The share reform works only if it is undertaken in a way that is consistent with maintenance of market stability and positive market development.

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Categories : Chinese laws and regulations


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