China’s stock markets plan to to limit trading halts to curb abuse

Models
showcase Ellassay on the trading floor of the Shanghai Stock
Exchange April 22, 2015 in Shanghai, China.
VCG/VCG via Getty Images

• China has finally announced changes that should cut down the
  unusually high number of its listed companies that jump off the
  bourse when they get a bad feeling about the direction of their
  share prices.
• The practice alienates foreign investors and has left
  
  millions of Chinese mum and dad shareholders out of pocket.
• Last year, according to
  Caixin, 69 Shanghai-listed companies suspended trading
  every single day, on average.
• The move comes as Beijing gropes for injections of momentum
  as the rate of growth in the world’s second-largest economy
  starts to slow.
• The Shanghai Stock
  Exchange  ( 上海证券交易所 ) issued draft rules on
  Wednesday that, if confirmed, should dramatically decrease the
  amount of time that shares are placed in a trading halt.

The Shanghai Stock Exchange has released long-awaited draft
changes to stop listed companies from simply halting trade in
their shares whenever they get a feeling that the market is going
to turn on them.

China is increasingly anxious to attract foreign investment as
the rate of growth in the world’s second-largest economy cools,
partly as it feels the impact of US tariffs.

The new rules are a major move in a regulatory crackdown on the
abuse of what was a common practice that peaked in 2017 and not
left serious foreign investors disillusioned but left Chinese mum
and dad shareholders out of pocket.

Beijing is struggling to attract foreign banks and financial
investment to try and balance out increasing capital outflow
pressures. If the new proposals are confirmed, they should
dramatically cut the time that shares can be arbitrarily placed
in a trading halt. 

Fang Xinghai, a vice-chairman of the China Securities Regulatory
Commission (CSRC), said China’s financial sector and its capital
market, which are more or less shielded by a closed capital
account, were failing to connect with the rest of the
world. 

“Foreign investment accounts for just 2 per cent of the total
value of the A-share market … so we need to open it up
further,”  The
South China Morning Post quoted Fang as saying on the
domestic broadcaster China Business Network.

Chinese stocks tipped into a bear market this year as relations
between Washington and Beijing continued to deteriorate amid a
climate of economic confrontation. 

The Shanghai Composite has fallen around 20% this year
–  an unnerving experience for the ordinary Chinese
investors that have been coaxed and cajoled by state media to
invest in Chinese listed companies.

China’s stock market hit a two-year low in June around the same
time that US President Donald Trump escalated trade
tensions by flagging further tariffs on Chinese goods.

The entire Shanghai draft rules are available
here.

Putting the house in order

Two
buildings share a stairwell at a residential area on October 11,
2018 in Nanning, Guangxi Zhuang Autonomous Region of
China.
VCG/VCG via Getty
Images

The major Chinese exchange has put forward that trading halts for
corporate restructuring should last for 10 days tops, with a
further option of applying for an extension, with suspensions
stretching out to 25 days if necessary for the disclosure of
documents or the supply of more information,
according to Caixin.

The current rules give companies up to three months for
restructuring and that’s where the problems have been festering.

China desperately wants to put a lid on its listed companies
putting their shares in a trading halt when the market turns
against them.

Such suspensions have often been used by companies as a pretty
convenient on/off switch to be hit at leisure whenever any bad
news threatens to upset the market.

Such suspensions can drag on until the clouds have lifted,
sometimes for months at a time. 

The move effectively locks up a shareholders money in stock that
they can’t even sell because its no longer even a part of the
moving market.

Last year, according to
Caixin, shares of 69 Shanghai-listed companies were suspended
on average every day.

This represents around 5% of all the companies listed for 2017.

According to Caixin calculations, this number has more recently
been whittled down to about 10, or 0.7% of the total, on an
average day.

Earlier this month, the CSRC first announced plans to stiffen the
rules for share suspensions. These latest draft rules are the
next iteration of the CSRC cracking down on the kind of practices
that unnerve foreigners and ensure China’s equity markets remain
a bit of a wild west for investors.

Chinese regulators and the officials that pressure them are well
aware that in August
Chinese shares ceded their ranking as the no. 2 stock market
in the world to Japan.

While China’s stocks eclipsed Japan in market value almost four
years ago to the day, both markets are now worth around $6.1 to
$6.2 trillion. 

To place that into some context, the US stock market, easily
the world’s largest, is valued at around $31 trillion. 

Unsurprisingly then the ugly spectacle of what outside investors
see as the wholesale abuse of trading suspensions has become a
focal point for regulators and is regularly cited as an
exemplification of why China’s stock markets have failed to
achieve the global legitimacy they have yearned for so long.

During 2015’s market crash, more than half of the companies
trading on China’s two stock exchanges halted trading, according
to Caixin.

The long march to legitimacy

A
woman walks towards the entrance of the National Exhibition and
Convention Center (Shanghai), the main venue to hold the upcoming
first China International Import Expo (CIIE), in Shanghai on
October 31, 2018. – As China seeks to counter charges that its
markets aren’t open.
JOHANNES
EISELE/AFP/Getty Images

After a series of rejections, the addition of 226 Chinese
A-shares into the widely watched MSCI Emerging Markets Index in
June represented years of of toil on the part of Chinese
administrators and officials.

Starting in 2014, bids for inclusion from Beijing were rejected
three times during MSCI’s annual reviews. 

MSCI called out the ease of trading stoppages as a major obstacle
for the international acceptance of the Chinese stock exchanges.

According to the draft released on Wednesday, there will be the
usual exceptions to the rule – any national strategic projects or
confidential military matters will be played by ear.

Trading halts for most other reasons, such as preparing for the
transfer of controlling shares, should last no more than two
days, with the option of applying for an extension to five days.

In principle, the drafts signal the end of trading halts caused
by natural market forces – bankruptcy restructuring for example –
although if deemed necessary the company can still apply for one.

The get out of jail free clause

And just in case, Caixin also reports that if the stock exchange
or the CSRC agrees that a company’s risks could flow through and
significantly impact market order, then the message was: come see
us about a suspension.