MNI: China Needs To Make Delisting Companies Easier - Advisors

Chinese authorities need to make it easier to delist underperforming companies and improve corporate governance if an official drive to boost the valuation of the country’s long-stagnant stock market is to succeed, policy advisors and economists told MNI.

While a recent improvement in China-U.S. ties and the shift by the Federal Reserve to holding rates steady will provide some positive impulse, the market’s fundamental concerns lie in “legalisation, marketisation, and governance modernisation,” said Zhao Jian, head at the Atlantis Research Institute.

This week’s stock action, with the Shanghai Composite Index holding above the psychologically key 3,000-point mark first attained in 2007 despite a worse-than-expected drop in October exports and an unexpected contraction in October PMI, “may hint at a near-term bottom,” Zhao said.

TOO MANY LISTED COMPANIES

The success of calls by the twice-a-decade Central Financial Work Conference last week to “vigorously improve the quality of listed companies” and “cultivate first-class investment institutions” will hinge on measures to purge lower-quality listings, said Liu Feng, director at the China Chief Economist Forum, who formerly served as a chief economist at China Galaxy Securities. While the launch of the registration-based IPO system has significantly expanded market capacity, only 120 companies were delisted from the A-share market from 2012 to 2022, with 20% of those removed as a result of mergers and acquisitions or privatisation, he noted.

The number of listed companies in China has jumped to over 5,000 from 2,000 over the past decade, while their average capitalisation has barely changed, Liu observed.

“Many of those with low efficiency have a state-owned background,” said Liu. Transparency over ownership structure needs to be further improved to better protect the rights and interests of small and medium shareholders, he said, noting that large-scale stock sales and equity pledges by major shareholders have contributed to negative sentiment and been to the detriment of small investors.

Reforming the governance of state-owned enterprises and allowing them to be subject to market-based mergers and acquisitions would be positive for stocks, according to Liu. Authorities could also strengthen “soft infrastructure” including public services and legal protection of individual rights and interests to win over consumers and investors, he suggested.

ECONOMIC RECOVERY

In the near term, further measures such as stake purchases by Central Huijin, the sovereign wealth fund, are unlikely to stem the decline in A-shares in the absence of a more sustained and solid economic recovery, said Wang Jun, director at the China Chief Economist Forum and chief economist at Huatai Asset Management. (See MNI: China Stimulus To Keep 2024 Growth Over 5%, Advisors Say)

Though stronger-than-expected Q3 GDP signals an initial recovery, with consumption contributing 94.8% to the 4.9% y/y overall expansion, retail sales declined by 3.73% in real terms, compared to 5.5% headline growth, according to Liu’s calculations.