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China: Exchanges try third time lucky

Regulator makes new attempt to solve 'legal person' shares overhang

China capital market
structure $bn

The Chinese securities regulator, the CSRC, has again announced proposals designed to restructure the domestic stock markets in Shanghai and Shenzhen. This will be the CSRC's third attempt to effect change, with the two previous attempts never getting out of the starting blocks. The main issue at hand concerns the enormous overhang on the market from state-controlled interests in most of the nearly 1,400 locally listed companies. These interests, deemed 'legal person' shares, represent approximately two-thirds of the total value of the stock markets, some $417 billion compared with $227 billion of shares that are freely tradable (see chart at right).

The perceived overhang of these shares, coupled with intervention and manipulation by the CSRC in the past, have created dysfunctional markets and led to the effective outsourcing to Hong Kong of China's principal source of equity capital. Botched attempts to address the overhang, in 1999 and again in 2001, led to the collapse of share prices and recriminations from investors.

This time at least, the government appears to be taking a more thoughtful approach.

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