China’s stock exchanges have capped the length of voluntary trading suspensions, in a move seen as the last obstacle to the inclusion of mainland shares in index provider MSCI’s global emerging-market benchmarks.
On Friday the Shanghai and Shenzhen bourses limited the length of stock-trading halts to three months if they are due to a “major asset restructuring" and one month for those related to private placements. It had not previously been clear how long companies could suspend trading or the conditions under which they could do so.
The move, which took place with immediate effect, came ahead of MSCI’s forthcoming decision on June 15 Hong Kong time (June 14 in Europe and the US). This follows moves by the Chinese authorities in the past four months to relax quotas for accessing onshore securities and clarify beneficial ownership of securities under the QFII and RQFII cross-border investment schemes.
The bourses now also require listed companies to improve information disclosure about "asset restructuring" during trading halts. If they do not resume trading within two months, companies will then need to disclose details of the targeted assets, potential fundraising needs, the restructuring process and of advisers they have hired.
Further, if a company expects to suspend trading of its stock for more than three months, it will have to call a board meeting to reach agreement on this, and provide a professional opinion from sponsors and advisers.
Some industry observers argue that the system, which is intended to deter speculation-drive price swings, is being misused. Companies have reportedly announced non-existent restructuring plans during suspensions to push their shares higher once trading resumed, only to later say that the plans failed.
Moreover, some trading halts last an inordinately long time. Trading was reportedly suspended in December for real estate group China Vanke's Hong Kong- and Shenzhen-listed shares due to a “material asset restructuring”. While trading resumed in Hong Kong on January 6, the suspension is reportedly still in place in Shenzhen, some five months later.
During the mainland equity market collapse last summer, more than 1,400 companies halted trading of their stocks on July 9, representing 52% of A-share companies and 34% of total market capitalisation. Among the 306 companies that suspending trading, 57% said it was down to “asset restructuring”, while 40% were more vague, citing “important events”, according to a Goldman Sachs report.
The Shanghai Stock Exchange (SSE) said the unusually widespread stock halts last July happened at an unusual time, when companies wanted to prevent share price slumps. It also said it aimed to maintain trading continuity and market liquidity and protect investors’ right to trade.
In a consultation paper issued in April, MSCI said widespread voluntary trading suspensions prevented normal trading activities and caused liquidity and replication problems, and that it wanted to see China’s exchanges make rule changes.
Beijing has continued to push for MSCI EM index inclusion this year. It sought to address concerns over investment quota allocation and capital mobility by changes to the qualified foreign institutional investor (QFII) quota rules in February. Then the regulator clarified beneficial ownership status under QFII and renminbi-QFII separate accounts, making it clear that securities belonged to the end-investor, not the fund manager of the accounts.
Fund managers agree the key hurdles have been addressed, but some have questioned whether it is relevant to consider voluntary stock suspensions when debating MSCI benchmark inclusion, as reported.