10/11/2024

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China Aims to End Age-of-Froth That Has Plagued Its Stock Market

China Aims to End Age-of-Froth That Has Plagued Its Stock Market

(Bloomberg) — China is seeking to end the years of speculator driven boom-and-bust trading by pivoting toward value investment in its once-a-decade capital-market reform plan.

The “Nine-Point Guideline” published by the State Council last week includes measures to encourage dividend payments, improve the quality of new stock offerings and plug corporate governance loopholes. Some investors are hoping this will help spur a revival in the nation’s struggling stock market, much like the previous plans did in 2004 and 2014.

“This is a massive event for China’s stock market as it will drive a reversion to investing for value, rather than speculation,” said Wang Mingli, executive director at Shanghai Youpu Investment. “Everyone is going to have to take a closer took at their portfolio and reassess if their trading style and the companies they picked are consistent with these rules, which will define investing for years ahead.”

Here’s a look at the key guidelines: 

Boosting Dividends

One of the main initiatives of the document, published April 12, is to see more corporate profits passed on to investors. The document stipulates that firms should provide their payout plans before they go public, specifies measures to boost dividends such as more mid-year payouts, and vows to reward companies that increase their profit distribution.

The guide also flags more severe punishments for firms that fail to meets dividend expectations. Companies listed on the Shanghai and Shenzhen mainboards that fail to distribute 30% of their profits, and pay total dividends less than 50 million yuan ($6.9 million) over a three-year period will be given an “ST” or special treatment tag, disqualifying them from key indexes and making them less attractive to institutional investors. 

The exchanges are already making inquiries into companies such as Jilin Expressway Co. to ask why they aren’t paying dividends, and justify why they aren’t rewarding investors. 

Many companies are starting to realize the issue of dividends shouldn’t be taken lightly, and nearly half of the 203 members on the CSI 300 Index that have released their 2023 earnings increased their dividend payout ratio by more than 1% from the previous year, data compiled by Bloomberg show. 

Favoring Bigger Stocks

The latest guideline doesn’t explicitly favor large-cap stocks over smaller ones, but many of the initiatives it puts forward are likely to have that result.

One of these is to increase supervision of quantitative funds, whose portfolios often include thousands of smaller, relatively thinly-traded firms. The guide also allows exchanges to charge higher transaction fees for the high-frequency trades that quants tend to favor. 

Regulators also seek to revamp delisting standards, which may favor large-caps over their smaller peers. Mainboard-listed companies may be delisted if their market capitalization fall below 500 million yuan for 20 sessions, higher than the earlier threshold of 300 million yuan. 

Scrutiny on Listings

China is also pledging greater scrutiny over new listings. The performance of IPO debuts worsened in the first quarter, with companies listed on mainland bourses rising an average 24% in the period, the worst showing since the same period in 2018.

Two of the four IPOs this month more than doubled on their debut, which was reminiscent of the days when vetting was stricter and the number of new listings was relatively rare. IPOs may become more attractive as only companies of better caliber are given approval.

Protecting Investors

The new guideline also seeks to reduce risk to investors by plugging a number of loopholes and seeking to make firms more accountable.

Rules on share sales by key stakeholders will be tightened to prevent them offloading stakes via lending stock to brokerages for short trades, or evading share sale restrictions. The window for management to dispose of equity will be halved to three months and only be allowed when shares are above their offer price and book value.

Regulators are also getting less patient with loss-making enterprises, requiring mainboard firms that are unprofitable to have a minimum revenue of 300 million yuan, three times the current amount, if they want to remain listed. Companies that are preoccupied with a fight over controlling rights also face removal, while there is a lower tolerance for those that make false disclosures and management that is seen to misappropriate a listed firm’s funds.

“The Nine-Point Guideline stresses oversight of listed companies throughout their life cycle and steps up the quality of firms, which may bring more inflows from long-term funds,” said Yang Ruyi,  fund manager at Shanghai Prospect Investment Management Co. 

–With assistance from Mengchen Lu.

©2024 Bloomberg L.P.