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China: No stock market revival, yet

More regulation is needed in China to reverse the decline in stock market prices.

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site

As readers may recall, the Chinese government implemented the non-tradable share reform in late 2006. In a nutshell, the reform consisted of converting non-tradable shares in PRC listed companies (which were mostly state-owned) to become tradable on the PRC stock market. To obtain the shareholders' approval needed for such conversion, holders of non-tradable shares would offer compensation to public holders of tradable shares who would suffer from the increase in liquidity.

As part of the share reform, holders of the non-tradable shares were also subject to a moratorium of 12-36 months before their shares became fully tradable. Due, in part, to successful implementation of this reform, the PRC stock market enjoyed a strong performance in 2007. Indeed, the Shanghai Stock Exchange Composite Index reached its historical peak in October 2007. However, since late 2007 weak investor sentiment has pushed the stock market into steep decline. To make matters worse, the moratorium imposed on previously non-tradable shares of a large number of companies will soon end, making the market even more nervous.

The effect of this could be big – by some estimates, the value of tradable shares flooding the market in 2008 will amount to about Rmb3 trillion ($430 billion).

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