Foreign investors have called on Chinese regulators to review the mechanism that allowed more than half its listed companies to halt trading in their shares during the recent market crash, trapping investors as prices tumbled.
As China’s stock markets dropped 30 percent in less than a month, about 1,500 companies listed in Shanghai and Shenzhen suspended their stocks, many citing reasons that would not typically require a trading halt or were not borne out by their subsequent actions.
As markets stabilized, more than half the suspended companies resumed trading.
The suspensions reduced liquidity in stock portfolios and exchange-traded funds, forcing some to suspend redemptions and making it difficult for banks to value derivatives based on mainland shares, known as “A” shares.
“We hope that after each and every situation like this, people do go over the rules and make improvements to make the market as investable as possible,” said Rodney Comegys, head of investments Asia Pacific at Vanguard.
Investors said a review of suspension rules was key if China hopes to be included in index compiler MSCI’s key Emerging Markets Index, which could bring in big flows of cash from foreign institutions.
“One of the issues [MSCI] may look closely at is shares suspension,” said Jack Lee, head of China A-shares research at global investment firm Schroders in Hong Kong.
“This incident shows there is room for improving the share suspension mechanism,” he said, adding that these were voluntary actions by listed companies.
FTSE Russell, another index compiler, will look at share suspensions as part of its A share review, an individual familiar with its thinking said.
Rules published on the Shanghai and Shenzhen exchange Web sites outline a range of circumstances in which companies should request share suspensions, none of which include a marketwide sell-off. However, the rules afford exchange officers a high degree of discretion to grant suspensions, one analyst said.
A Reuters analysis of 100 companies shows nearly three-quarters requested a trading halt due to “significant matters,” such as deals or asset restructurings, though 30 resumed trading without completing a transaction.
The rest cited the creation of employee stock ownership plans (ESOP) or management incentive schemes, an event that does not explicitly require a suspension under China’s exchange rules, or in markets such as Hong Kong or London. Half failed to complete the plan.
“Many companies aggressively pursued suspensions under the guise of supposedly establishing ESOP plans and other ownership-related matters, to avoid their share price from plunging,” one Shanghai analyst said.
The Shanghai Stock Exchange, Shenzhen Stock Exchange and China Securities Regulatory Commission (CSRC) did not respond to requests for comment.
Separately, China has made 2.5 trillion yuan to 3 trillion yuan (US$400 billion to US$483 billion) of funding available for government agency China Securities Finance Corp (CSF, 中國證金) to support the stock market, people familiar with the matter said.
The funding is to offer liquidity support to brokers and to purchase stocks and mutual funds, the people said.
The money was available from the central bank’s relending facility; credit lines with commercial banks; borrowing by CSF in the interbank market; and bonds and short-term notes sold by CSF, the people said.
Banks including Industrial and Commercial Bank of China Ltd (中國工商銀行), China Construction Bank Corp (中國建設銀行), Bank of China Ltd (中國銀行) and China Merchants Bank Co (招商銀行) had each already provided credit of at least 100 billion yuan to CSF as of Monday, bank officials familiar with the matter said.
Additional reporting by Bloomberg
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