(Yicai Global) Aug. 1 -- Arbitrary trading suspensions by listed companies have long festered as the most egregious blots on China's A-share market.
This situation has worsened in recent years, sowing discontent among investors as well as widespread international censure.
Regulators must rid the market of this chronic disease.
This issue received due prominence at a regular press briefing China Securities Regulatory Commission (CSRC) held on July 28. The regulator will continue to improve trading suspension and resumption policies for listed companies, and tighten frontline regulation by stock exchanges over trading suspension practices among listed companies, CSRC's spokesman Chang Depeng stressed. While ensuring effective share trading suspension and resumption operations, efforts will go to guiding listed companies in exercising their right to prudently suspend trading to reasonably maintain the continuity of transactions and market liquidity.
Morgan Stanley Capital International (MSCI) is also alert to trading suspension abuses in the A-share market. The global stock index provider reiterated the issue when it announced its decision to include A-shares in its emerging market index in June. MSCI has been closely monitoring the 222 A-share stocks to be added to the index next year, a company source said, adding that if any are suspended from trading more than 50 days, MSCI will prune them from the index.
The trading suspension policy seeks to prevent excessive share price fluctuations following major reorganizations. In practice, however, companies have arbitrarily abused the policy to circumvent trading rules. Some suspensions have lasted excessively long and in some cases the companies failed to disclose relevant information as required. About 259 A-share companies are currently suspended, or 7.84 percent of the total. Forty-fix have been suspended from trading for more than 100 trading days, and four have been halted for over 300.
Overly-frequent trading suspensions are bad for both the capital market and investors. The A-share market saw over 1,000 stocks hitting limit down on a single day due to a liquidity crunch during the 2015 stock market crash. Some companies – at times over 100 -- filed for trading suspension to avert market meltdown. The liquidity pressure consequently concentrated on companies not applying for suspension further exacerbated funding shortfalls and set off a vicious cycle.
If many stocks are suspended, the efficient flow and allocation of funds and resources will suffer as a considerable amount of invested funds are locked up. Worse, long trading suspensions may inflict disastrous losses on investors who borrow to finance equity investment.
Regulators have rolled out various policies to effectively regulate trading suspension. Aside from relevant terms in listing rules, the Shanghai and Shenzhen stock exchanges have introduced guidelines for trading suspension and resumption, and set out specific time limits for these, e.g. suspensions for private share placements without any major asset acquisitions should not exceed 10 trading days, with the maximum trading suspension fixed at six months irrespective of cause. Major asset reorganization procedures have been streamlined, and companies must obtain approval from shareholders if their shares stop trading more than three months in total. These measures have delivered results, yet failed to address the root cause.
To cure the market of this chronic malady, regulators must effectively stiffen their routine regulatory operations. Exchanges must conduct rigorous checks of firms applying to suspend trading and regularly check progress of proposed deals against their original schedules. If a suspension transpires as fraudulent, or the progress in the deal proposed greatly deviates from its original timetable, the company involved must be ordered to resume share trading forthwith, with suitable penalties meted out where necessary.
Exchanges must impose regulatory sanctions on listed companies abusing their right to suspend trading or failing to truthfully disclose relevant information accurately and completely or to honor promises they have made to the public. A compensation mechanism should be introduced to cover investors' losses caused by prolonged trading suspensions that fail to deliver any material results. Regulators cannot effectively address the issue of arbitrary trading suspension unless they impose harsher penalties.
The Chinese economy needs a strong and mature capital market. The 12-month regulatory crackdown has failed to eradicate illegal activities on the stock markets. Many obstacles still stand in the way of advancing various market-oriented reforms in China and adapting it to the global market. All hinges on financial regulators' ability to sustain efforts to purge the stock market of illicit trading suspensions and other chronic complaints.