China's
securities experiment: the challenge of the globalization
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Note: Footnotes Omitted
Part
III. Foreign Investment In Chinese Securities
China¡¯s
equity markets are connected with international capital
markets through two channels, one is the issuance of B shares
to foreigners by Chinese companies listed in China, the
other is to list Chinese companies overseas. These two channels serve as alternative
ways for China to attract foreign investment. By the end of 1998, 106 companies had issued B shares with
a total of 9.589 billion shares issued and a total of US$
4.745 billion capital raised. As to overseas listing, by the end of
1998, 43 Chinese companies has listed shares overseas, of
which 31 were in Hong Kong, 8 dual listed in New York and
Hong Kong, 2 dual listed in London and Hong Kong, and one
in Singapore. However, the impact of B shares and overseas
listing upon China is more than capital raising. More importantly, it represents the step-by-step
opening up of domestic financial market to foreigners, which
will eventually lead to profound changes.
One indication is that the Chinese government allows
foreign securities firms to set up joint ventures or independently
to invest in the B shares market.
A. Foreign Investment Shares Listed
in China ¨C B Shares
Coming into existence in 1991, the B shares markets perfectly reflect
Chinese leaders¡¯ mixed feeling toward the internationalization
of securities markets, namely, making use of foreign capital
without shaking socialist public ownership.
The activities of B shares are governed by mainly
two regulations promulgated by the State Council and the
CSRC, respectively, of which one is Regulations on the Listing of Foreign Investment
Shares in China by Joint Stock Companies (hereinafter
¡°B Shares Regulations¡±), the other is
Implementing Rules of the Regulations on the Listing of
Foreign Investment Shares in China by Joint Stock Companies
(hereinafter ¡°B Shares Implementing Rules¡±). As oppose
to A shares, B shares present the following features:
First,
B shares are denominated in Chinese currency (Renminbi),
but are subscribed for, bought and sold in foreign currency,
and listed and traded on securities exchanges in China.
Dividends and other payments by the issuing company shall
be calculated and declared in Renminbi but paid in foreign
currency. Second,
B shares can only be issued to overseas investors, which,
according to the Chinese definition, shall include foreigners,
persons from Taiwan, Hong Kong and Macao, and Chinese citizens
that are residing abroad.
Chinese in the mainland of China are not allowed to buy
and trade in B shares.
Third, dividends and capital gains from B shares
can be sent abroad freely despite China¡¯s comparatively
strict foreign exchange control.
Fourth, foreign securities firm can serve as dealers of
B shares while they are not allowed to step in the business
of A shares. The CSRC authorized the two stock exchanges
to enact stipulations about under what requirement foreign
securities firms can enter into agency agreements with brokers
in China or act as dealers in trading B shares.
In Shanghai Stock Exchange, Overseas dealers seeking to
deal in B shares require a recommendation from a domestic
securities dealer, paid-up capital of at least US $10 million,
local business experience of at least 5 years, a good reputation,
suitable premises and sufficient staff. The qualifications for foreign firms to
become authorized B share dealers under the Shenzhen rules
include: a relatively strong international securities business,
a good professional reputation, and experience in developing
international securities business.
Once approved, foreign operators may underwrite and co-manage
issues of B shares. While foreign
brokers own their seats, they are not full members with
voting rights.
The first foreign securities firm entering into Chinese
securities markets is Morgan Stanley & Company, which
established a joint venture entitled China International
Capital Corporation with China Construction Bank and several
other partners in 1995.
Chinese regulators has taken many measures to boost B shares markets, nonetheless
the market itself is far from attractive and performs not
very well. The
well ¨C known problems in B shares markets are its lack
of liquidity, restriction on foreign securities firms, lack
of proper disclosure of information, and uncertainty of
B shareholders rights with respect to the issuers. Specifically, the problems are present in the following manner.
First, under the B Shares Regulations, information
disclosure documents of the issuers for B shares shall be
prepared in Chinese.
Although the law stated that a foreign language version
documents can be provided when needed, it is not required.
This might result in the investor having inadequate disclosure
because of language barriers.
Investors also lack trust in China¡¯s accounting
system. The
B Shares Regulations insincerely stipulate that the issuing
company may provide financial reports adjusted according
to the International Accounting Standards or the accounting
standards of the place outside China where the offer is
conducted, reports thus produced are still unreliable because
the overall reports of the company produced according to
China¡¯s Enterprise Accounting Standards which does not
inspire popular confidence so far.
In terms of shareholder¡¯s rights, the B Shares Regulations
explicitly offer the same rights to foreigners as their
domestic counterparts.
In addition, a foreign shareholder may entrust a proxy with
exercising his shareholder¡¯s rights on his or her behalf.
However, this provision may not be that much meaningful
because the regulations did not grant the shareholders the
right to pursue derivative action. Lack of such a provision shareholders
may not have a legal basis to sue directors and officers
who have violated their fiduciary duties.
Moreover, shareholders who intend to control a Chinese company
through trading of B shares may be frustrated, because they
are not allowed buy A shares which generally constitute
the majority of total shares in a company. All these serve as obstacles to bar the
further development of the B shares markets.
B. Overseas Listing
From the listing of Qingdao beer on the Hong Kong Stock Exchange on
July, 1993 to Yanzhou Coal IPO and dual listing in Hong
Kong and New York in April 1998, 43 companies listed overseas,
raising more US$ 10 billion.
Hong Kong serves as the most important capital market for
mainland Chinese companies, so-called the window for China
to interact with the western world, and shares listed thereon
enjoys a notorious name H shares. New York is another Chinese companies¡¯
favorite. In
July 1993, Shanghai Petrochemical Co. listed its ADRs representing
its listed shares in Hong Kong, and in 1994, another large
State enterprise Shandong Huaneng Power Development Co.
Ltd became the first PRC company to list its securities
directly in New York ( where its shares are called N shares
in China).
Partly because Chinese are very concerned about face-saving (ai mian
zi) and partly because the effective supervision of local
authorities, so far the overall performance of 43 Chinese
companies listed overseas is not bad.
In 1997, 39 of the 43 overseas listed companies recorded
profits, totaling nearly RMB 15 billion, while 60% of the
overseas listed companies sustained growth in profitability.
Three companies, Shanghai Petrochemical, Guangdong Kelon
and Datang Power, were once rated by the Hong Kong Stock
Exchange and the Asian Money Magazine as the ¡°best managed
companies¡±, ¡°best information disclosure companies¡±,
¡°best global growth companies in Southeast Asia¡±, and
¡°best investor relationship companies¡±.
Though
Chinese companies are zealous in going to foreign stock
exchanges, the regulator, on the contrary, is very cautious
in the process of examining and approving applications.
The CSRC set up very high standards, thereby only
China¡¯s star enterprises and large key enterprises in their
respective industries can be approved.
According to the governing regulations and rules, any application
to be listed outside the PRC must be subject to the approval
of State Council Securities (SCSC). Moreover, the requirements of corporate
governance and shareholders protection upon overseas companies
are much higher than those upon domestic companies.
In the Special Regulations of the State Council on
Raising Capital and listing Overseas by a Joint Stock Company,
it is required that companies issuing shares on overseas
markets must maintain their accounts in compliance with
both international standards and principles generally accepted
in China. Any inconsistencies between
the information contained in the various language versions
must be explained publicly. Another distinctive feature
of the Regulations is its elaborate procedures for shareholders
notice, according to which, all shareholders holding overseas
shares of a company are to be registered with the company,
but the company may keep outside PRC its register, and entrust
a foreign agency (such as Depository Trust Company ¨C DTC)
to administrate it. In case of a meeting to be held, notice
must be given in writing to all current record shareholders,
and shareholder¡¯s reply must be received 20 days before
the scheduled meeting.
Second public notice all shareholders must be sent in case
that replies received amount to less 50% of the voting rights.
Those procedures, never appearing in previous laws, set
forth a clear standard to ensure shareholders to exercise
their rights. In addition, empowered by the regulations,
the SCSC prescribed the Mandatory Articles of Association
of Companies for Overseas Listing, requiring all overseas
listed companies to incorporate it in their articles of
associations.
In commentators¡¯ view, the Mandatory Provisions represent
a new benchmark in the development of corporate law, more
advanced than that of the Corporation Law, perceived by
Chinese¡¯s legislators, judges, and scholars.
