China to begin short selling

China to launch securities margin trading soon

(Xinhua)

Updated: 2008-10-05 21:47

China's securities regulator announced Sunday that it will soon launch margin trading business for securities firms, which has long been expected by the market.

The business, allowing traders to borrow part of the money necessary to buy a security or borrow security to sell, and practiced in most bourses across the world, would change the current one-way trade on both Shanghai and Shenzhen stock markets and serve as a risk aversion tool for investors.

Sources with the China Securities Regulatory Commission (CSRC) identified the principle of starting the business as "test run first and to be extended gradually".

Securities firms are only allowed to use its own capital and securities for the experiment margin trading in China. The initial margin will be set at 50 percent of the purchase price when buying eligible securities or 50 percent of the proceeds of a short sale.

The maintenance margin, or the sum required to be maintained on deposits at all times in case of liquidity crunches, will be at least 30 percent of the financed equity value.

Although margin trading would expand the business and broaden the use of capital and securities of securities firms, a CSRC official said on the background that window guidance or moral persuasion by the regulators would alert securities firms to be more conservative with their investment.

They could ward off the risks in line with their actual situations by raising the threshold of their clients and lifting up moderately the margin requirements, said the official.

The financial leverage, or the degree to which a business is utilizing borrowed money or securities to fund its operation would only be twice as much as its own equity, the official said.

The CSRC will handpick the first batch of eligible securities firms by scrutinizing their net capital, a key measurement for solvency and operation capability, track of records in compliance audit, current risk of control indexes and their plans for the upcoming test run.

A CSRC statement released on Sunday said that the experimental project was open to all kinds of securities firms across the whole country.

If the experiment proves smooth, margin trading would be normalized in all securities firms, it said.

The CSRC will clarify the qualifications and criteria later and promise to bring in an expert panel to handle applications in an open and transparent manner.

As the business can multiply both profits and losses, CSRC officials urged securities firms not to jump at the project before acquainting themselves with the rules and thinking well of the potential risks.

The CSRC sources told Xinhua the authorities would tighten supervision to forbid any individual or institution to start margin trading without authorization.

Given that the business will amplify capital and securities demand as well as turnover, analysts regard the move as a latest incentive from the regulators to activate the market.

On the last trading day before the week-long National Day holiday, China's benchmark Shanghai Composite Index closed at 2,293.78 points, after plummeting nearly 70 percent from the record high of 6,124 points last October to the new low of 1,802.33 points in September.

The new move came after the country scraped the tax upon share purchases and allowed Central Huijin, a government investment arm, to buy in the stocks of the country's three biggest banks, namely the Industrial and Commercial Bank, China Construction Bank and Bank of China.

The lift of restrictions preventing controlling shareholder to buy back shares also gave a boost to the mainland stock markets shrouded by lingering fear over economic uncertainties.

The CSRC Sources did not expect massive short sales to come but instead regard the trading as a tool to secure "rational prices" by optimizing the pricing mechanism of stock markets.

A CSRC official told Xinhua on anonymity that the risks of margin trading experiment were "controllable" because margin lending would outweigh short selling.

"Massive short sales were barely possible considering the large proportion taken by money in the assets of securities firms. "The securities eligible for sale are relative small," said the official.

Director Cheng Wenwei of the Research Institute of the Hongyuan Securities said that stronger upward momentum would depend on government policies and the performance of peripheral markets.

Attributing the market tumbling over past months to insufficient demand and gloomy expectation over business profits, he said that the rising prices of raw materials, strengthening Yuan, slowing exports, higher labor costs and credit tightening had concurred to cause the rapid decline in corporate net profits.

"Once reasonable returns come in sight, long-term capitals would be lured into the market while the current oversupply on the second market would be reversed," he said.

If the $850-billion rescue package of the United States government could spur local and peripheral markets, mainland A-share market would also feel the positive ripple effect, he said.

Risks for overseas expansion

Banks' overseas M&A challenges outlined

By Liu Jie (China Daily)

Updated: 2008-10-10 08:58

Chinese banks have good reasons to venture abroad but face a range of challenges, so they need to be selective as they pursue cross-border merger and acquisition (M&A) deals.

According to a latest report, titled Venturing Abroad: Chinese Banks and Cross-border M&A, compiled by The Boston Consulting Group (BCG), Chinese banks have been seeking larger and more ambitious M&A deals, many of which have involved taking stakes in foreign institutions.

BCG is a global management consulting firm and the world's leading advisor on business strategy.

From 1993 through 2005, Chinese banks made an average of about one cross-border acquisition per year. Most deals were valued at under $20 million. Since then, Chinese banks have made 11 outbound M&A deals, five of which worth at least $1 billion.

They conducted the deals in a bid to channel their excess funds, follow customers overseas, become global companies, adhere to national directives, extend products and service offerings, import skills into China, diversify the banks' businesses and risks, increase scales and lower costs, or leverage capabilities abroad.

However, in addition to strategic opportunities, they still face many risks. At the management level, risks include lack of full support from senior management, managers lacking experience in overseas markets and M&A, and conflict with targeted companies.

Unfamiliarity of regulatory and legal frameworks and lack of support from local regulators and officials are also regulation risks.

Operation risks involve insufficient and/or unreliable information to conduct fair valuation, few deal structure options, complexities of cultural differences, failure to extract cost synergies and integrate operation, loss of local talent, loss of existing clients, customers and momentum, inability to transfer best practices, as well as loss of shareholder value or failure to communicate shareholder value, according to the report.

"Chinese banks face a series of challenges as they pursue overseas M&A deals, but they are moving inexorably toward a more international profile," said a co-author of the report, Tjun Tang, a partner in BCG's Hong Kong office.

Their size alone makes them capable of influencing markets, particularly if they can harness the momentum of China's global challengers - dynamic companies that are heading abroad.

"To build strong international positions, however, Chinese banks still need to develop core skills and capabilities," Tang said. "Selective M&A deals can help accelerate this process."

According to another co-author, Frankie Leung, also a partner of BCG in Hong Kong, Chinese banks have good reasons to pursue cross-border deals but some investors and analysts believe they should concentrate on opportunities closer to home, given the country's strong growth.

"They have also questioned whether Chinese banks have a clear strategy - along with the skills and resources - for venturing abroad," said Leung.

He addressed that M&As are inherently risky and complex, and transnational deals tend to pose even greater challenges than domestic ones. The steps that Chinese banks can take to build and execute a strategy for cross-border M&As were recommended as below:

Follow a clear and convincing rationale for outbound M&A

Start small and build M&A capabilities

Ensure deal structure and degree of integration support deal objective

Identify approaches to add value to the target company

Retain and empower key local management talents

Engage in pro-active communication to target company staff, investors and the public

There are also opportunities for foreign banks in partnering with their globalizing peers from China. Foreign banks could look for opportunities to provide Chinese banks with the presence to serve their globalizing customer base. In turn, the cash-rich Chinese banks can help foreign banks weather the current financial crisis.

"Chinese banks need to look beyond potential financial gains," said co-author Holger Michaelis, a partner in BCG's Beijing office. "They need to look for ways to acquire new capabilities, enhance their offerings, and leverage their emerging-market skills."

Western banks, particularly those that have been hit hard by the crisis, might consider selling business lines as a way to free up capital and refocus on core objectives.

"Chinese banks have both the capital and the incentive to make such purchases," Michaelis said, adding that Chinese banks are not direct competitors - at least not yet - and therefore present a better option for foreign banks seeking to divest business lines.

http://www.chinadaily.com.cn/bizchina/2008-10/10/content_7093530.htm

Foreign partners in JV

Beijing regulator wants JVs to disclose status of foreign partners

Reuters in Shanghai

Updated on Oct 08, 2008

Mainland's securities watchdog has urged fund ventures partly owned by foreign financial institutions to disclose the financial state of their partners, reflecting increasing government concern about the spreading impact of the global financial crisis.

Joint venture fund companies need to report this month how their overseas shareholders have been affected by the escalating crisis, and how that might affect the ventures' operations, according to an e-mailed request by the China Securities Regulatory Commission (CSRC).

“The concern is that some troubled foreign shareholders such as AIG might eventually pull out of their ventures, thus, affecting management stability,” said Liang Jing, analyst at Shenyin & Wanguo Securities. “The overseas crisis could also hurt some investors' confidence in JV funds.”

In an e-mail the CSRC sent to the fund ventures, the commission said:

“Recently, the international capital markets are hugely affected by the subprime crisis. In order to understand foreign shareholders' situations, and strengthen supervision, JV fund companies please obtain information and pay close attention to the operational status of foreign shareholders.

“Please submit after the national holiday a report in the form of an e-mail on how your foreign partners are affected by the financial crisis and how that could affect the joint venture fund company.”

A CSRC spokeswoman declined to comment.

CSRC is joining other regulatory bodies in containing risks stemming from the financial turmoil that has embroiled western firms like Fortis, American International Group and Societe Generale. The three firms all own mainland fund ventures.

Mainland's banking watchdog has toughened guidance on banks' capital adequacy requirements, while the country's insurance regulator has also stepped up monitoring insurers' repayment abilities.

The CSRC move came after Hua An Fund said last month that the operation of its overseas investment fund was seriously affected by the collapse of Hua An's business partner, Lehman Brothers.

There has also been some concern over the health of Shanghai-based AIG-Huatai Fund, after foreign shareholder AIG was thrown a lifeline federal loan on September 16 and announced plans to sell side businesses to pay off debts.

Troubled financial group Fortis also owns a fund venture in mainland, Fortis Haitong Investment.

FIEs must unionize under PRC law

Overseas firms must unionize - trade union official

By Guan Xiaofeng (China Daily)

Updated: 2008-10-08 07:13

All foreign-funded companies in China will be unionized by the end of next year, an official with China's top trade union body said Tuesday.

Wang Ying, a division chief of the grassroots organizations and capacity building department of the All-China Federation of Trade Unions (ACFTU), said more than 4,100 major foreign companies run by the Fortune 500 are doing business in China.

She said 82 percent of the companies have formed trade unions to date, and the figure would reach 90 percent by the end of this year. As of July, workers had been able to form trade unions in less than 50 percent of the Fortune 500 firms.

Wang said the dramatic shift resulted from a three-month national unionization campaign that began in June.

The ACFTU is directly responsible for supervising the formation of trade unions in 10 of the Fortune 500 companies.

Currently, Maersk Logistics, Lotus, IKEA, TNT, Kodak, FedEx, Home Depot, Emerson, Canon, Sony and ABB have trade unions.

"Most of the foreign companies have been cooperative, as they know they must abide by China's laws if they do business in China," she said.

She said the ACFTU had also met "tremendous resistance" from some foreign firms, especially American companies.

"Some US companies, such as Wyeth, Microsoft, 3M, AstraZeneca and PwC, have been quite uncooperative and have used various means to delay the establishment of trade unions," she said.

"Workers do not need the approval of their employers to form trade unions, because the Trade Union Law, promulgated in 1992, gives them that right," she said.

"However, it is still very important in practice for workers to gain support from the employers in forming unions."

She said both the American Chamber of Commerce in China and the Japanese Chamber of Commerce and Industry in China have shown support for the ACFTU over the issue.

By law, employers must allocate 2 percent of workers' pay for trade union funds. Wang explained 40 percent of the funds go to the superior trade union and 60 percent remains in the company.

Senior ACFTU official Yang Honglin said some foreign companies still have misconceptions about trade unions.

"Trade unions in China not only safeguard workers' rights and interests but also contribute to a company's development," he said.

ACFTU vice-chairman Sun Chunlan told a press conference Tuesday in Beijing that the ACFTU is leading another nationwide push for collective wage negotiations.

She said all the 108 Wal-Marts in China had signed collective contracts with their employees through negotiations by September 16.

http://www.chinadaily.com.cn/bizchina/2008-10/08/content_7085922.htm

Chinadaily: new dividends policy

Securities regulator raises refinancing threshold

(Xinhua)

Updated: 2008-10-10 09:50

China's securities regulator on Thursday said publicly-traded companies must pay dividends in cash rather than stock over three years before submitting their refinancing applications.

The move could help to encourage long-term investment and reduce market volatility, the China Securities Regulatory Commission (CSRC) said.

The benchmark Shanghai Composite Index has plunged 66 percent from its record high last October.

In a new regulation stipulating cash dividend payment by listed companies, the CSRC said: "The listed firms, if applying for refinancing, must pay dividends in cash totaling no less than 30 percent of its distributed profits over the past three years."

The regulation went into effect on Thursday.

In the draft version released in August, companies were allowed to pay dividends either in cash or stock.

The listed firms were also ordered to reveal their cash dividend policies and previous cash dividend data to investors in their annual reports to improve transparency.

"The listed company should give reasons why it failed to pay a cash dividend if it is able to and where the money goes," according to the rule.

Cash dividends could offer stable investment returns and prompt large institutional investors to reduce speculation on the secondary market, the regulator said.

A couple of huge refinancing plans earlier this year triggered a market plunge on concerns over stake dilution and liquidity stress.

In a separate regulation on share buy-back, also effective on Thursday, the CSRC said it allowed a cash dividend payment when the controlling shareholders bought stocks on the secondary market.

Such action was banned in the draft version released in late September to solicit public opinion.

Share buy-back through bidding at stock exchanges also no longer needs regulatory approval.

The CSRC added it would continue to revise the rules on stock buy-back and also give consideration to repurchase through agreement or tender offer.

http://www.chinadaily.com.cn/bizchina/2008-10/10/content_7094132.htm

SOE employees banned ownership in affiliates

China to curb SOE losses through staff ownership

(Xinhua)

Updated: 2008-10-09 20:17

China's State assets watchdog is set to ban State-owned enterprise (SOE) employees, particularly management staff, from owning shares in SOE affiliates and subsidiaries, in a move seen as an attempt to stop state assets ending up in private hands.

The measure was a crackdown on speculation by SOE management on SOE reform, through irregularities in management buyouts, and would prevent losses of state assets, Zuo Daguang, director of the watchdog's Liaoning branch, told Xinhua on Thursday.

"Staff, particularly middle and senior management, are forbidden to invest in companies that provide the SOEs with fuel, raw and auxiliary materials, equipment and spare parts," said the State-owned Assets Supervision and Management Commission (SASAC).

The prohibition extended to companies that provided design, construction, maintenance, sales and intermediary services for SOEs.

Staff investment is also banned in companies involved in business similar to that of the SOEs, according to the proposals on regulating SOE employees' shareholding and investment, published by the SASAC on Wednesday.

The SASAC also highlighted in the new rules that the SOE staff could in principle only hold equities of their own companies, not subsidiaries or other SOE-invested businesses.

The regulations did not apply to listed companies mainly held by the State.

In order to contain insider-control and state-owned assets losses, the SASAC and the Ministry of Finance jointly issued a document in April 2005, forbidding management boyouts of large SOEs.

SOE management ownership of equities in affiliates, subsidiaries and SOE-invested companies has led to problems, such as executives procuring products or services of those businesses at prices unreasonably higher than the market price, resulting in "state-owned assets losses in disguise", said Zuo Daguang.

Public discontent with state assets losses and privatization has been in rumbling on since the SOE reforms were launched three decades ago.

Last March, the SASAC issued similar proposals specifically designed to regulate employee shareholdings in power generating SOEs. The proposals said such SOEs were to be the first to buy shares transferred by their staff.

But uncertainties over the enforcement of the regulations and the definition of senior and middle management could continue to puzzle state assets supervisors, said a SASAC research center expert who declined to be named.

According to the new document, SOE senior and middle management are required to transfer such shares or resign from the posts within a year of the publication of the new rules, but the new rules prescribe no penalties for failing to comply.

The proposals encouraged employees of small and medium-sized SOEs to own shares of the SOEs, a move that has been contemplated for more than a decade to help smaller firms out of debt and push them into competition.

But they stipulate that employee stakes in large SOEs should be minority shareholdings to maintain their nature of state ownership. Large SOEs, particularly the 147 giants reporting to the central government, include industries crucial to state security and national economy, including petroleum and petrochemical, power and telecommunications.

http://www.chinadaily.com.cn/bizchina/2008-10/09/content_7093028.htm

Shareholders' Right to Dividends in China

Listed firms ordered to increase dividend payments to 30pc

Beijing has continued efforts to boost investor confidence, requiring listed companies to increase dividend payouts and allowing an additional four overseas institutions access to the A-share market.

Listed companies were not eligible to hold share placements unless they paid 30 per cent of their annual distributable profits over the past three years as dividends, the China Securities Regulatory Commission said yesterday.

The previous requirement was set at 20 per cent.

The regulator also approved four institutions to take part in the qualified foreign institutional investor scheme, bringing the total number to 69.

"The regulator is striving to arrest a decline in the market or to at least slow the downward momentum," said China Jianyin Investment Securities.

"Obviously, the efforts didn't pay off as the market is still engulfed by bearish sentiment."

The Shanghai Composite Index fell 74.011 points or 3.57 per cent to 2,000.572 yesterday following a global equity rout on Thursday.

The CSRC proposed to raise dividend levels in August and solicited public opinion.

The regulator said yesterday that the new policy would take immediate effect, aiming to give the moribund market another lift.

Xinhua reported yesterday that four companies - First State Investments, Daiwa Asset Management, Shell Asset Management and T. Rowe Price International - had received approval to invest in A shares.

With the new approvals, the US$30 billion QFII quota, which was raised from US$10 billion early this year, has been used up, according to Xinhua.

Since last month, Beijing has unveiled market-moving policies ranging from encouraging state-owned companies to buy back more shares to the cancellation of stamp duty on the purchase of stocks.

However, analysts said the regulator had not been able to fine-tune any of the incentives to give concrete support to the falling market.

"The regulator took measures to psychologically boost investor confidence while failing to solve the fundamental problem," said Zhou Xi, an analyst with Bohai Securities. "The key index will keep falling because none of the policies are taking effect."

On October 5, the CSRC announced that long-expected margin lending and short-selling practices would soon be launched but it did not set a timetable for their debut.

Between September 19 and 25, the Shanghai index jumped 21.19 per cent as investors took heart from the policies. However, it has since retreated 12.92 per cent.

South China Morning PostDaniel Ren in Shanghai
Updated on Oct 11, 2008