Walter Hutchens’ Blog

Today I posted some comments to CLNET, responding to some material someone provided about a recent case in which a PRC listed company tried to make its unlisted shares tradable through a local property rights exchange. Unfortunately, CLNET is not archived. Here’s the exchange:

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To: clnet@u.washington.edu
From: Walter Hutchens
Sent by: CLNET-owner@u.washington.edu
Date: 08/02/2003 10:08AM
Subject: Re: fan ben shouxiao AND Nanjing Xinbai

Very interesting stuff.

A few comments:

1. Note the CSRC official quoted as saying that the CSRC is not enforcing its Oct. 2001 notice which reiterated that all transfers of listed co shares (including “illiquid” shares) must, per Art 144 of the Co. Law, occur through a stock exchange. Administrative pragmatism is nice, but imagine working in a law firm trying to issue an opinion that a sale of shares complies with PRC law–and here is a provision in the Co. Law and a CSRC Notice saying that you must do it a certain way, and your client is doing it another way, but even CSRC officials are telling the press that the CSRC notice (and hence the Co. Law provision?) is a dead letter (even though neither has been repealed), yet you are supposed to issue a LEGAL opinion, not a nod at “this is how it’s done and everybody knows it despite existing legal provisions.” This suggests I think something about the “soft” role of law even in a highly regulated area like securities transactions. Bureaucratic discretion (the approvals or at least indifference of all the youguan bumen) routinely trumps “law”. As I have opined before, if the essence of US law is “it is the business of the courts to say what the law is,” the essence of PRC law is “nothing without govt. approval” (wei jing pizhun bu ke), or, conversely, with the right approvals, shenme dou xing (you can do anything).

2. The notice of the Nanjing CSRC office on Xin Bai bragged about how its “rapid response mechanism” was so effective in shutting down this “irregular” transfer. Clearly the problem of illiquid shares should be solved in a comprehensive, official way, but this spin on the action made me chuckle. Yes, how marvelous that all those govt. depts could coordinate their efforts to react so quickly and stop an economically desirable (at least to the parties) transaction. A basic purpose of capital markets is to efficiently allocate capital. A basic purpose of the PRC bureaucracies often seems to be to frustrate this function. “Protecting” the state’s assets in this way actually seems to hamper the state’s development, and “gui fan” here does not just mean regularizing or standardizing, it means asserting sclerotic central control.

3. A tangent of earlier discussions on the “third board” related to the number of private co’s in China . While others correctly pointed out that there have been only a handful of “p-chip” IPO’s, I cited a quote from former CSRC chairman Zhou Xiaochuan that there are about 200 private listed co’s. This number sounds inflated to many observers (including me). But note in the material Deng Jiong provided the reference to 42 change of control transactions of listed companies in Q1 2003 (and noting a record 168 such transactions in 2002), and further noting that 2/3 of these 42 deals were transfers of state-owned shares to private enterprises. This suggests how the number of private company IPO’s only reflects a small number of the “private” listed cos.

4. All this (and the Shenzhen Development Bank-Newbridge Capital deal discussed before) underscores that M&A action in China, including for listed co’s, occurs virtually without reference to the public stock markets. Carl Walter & Fraser Howie discuss this in their excellent new book, Privatizing China, noting how the PRC has created “parallel markets” through these various share types, but that there is creeping privatization through the transfer of “illiquid shares”, which is ironic given that the share types scheme was created to avoid privatization.

Walter Hutchens
Assistant Professor
Smith School of Business
University of Maryland
http://www.rhsmith.umd.edu/lbpp/whutchens/

—–CLNET-owner@u.washington.edu wrote: —–

To: ,
From: “Deng Jiong”
Sent by: CLNET-owner@u.washington.edu
Date: 08/02/2003 02:18AM
Subject: Re: fan ben shouxiao AND Nanjing Xinbai

Hi Knut:

An interesting follow-up news release regarding your studies of Nanjing Xinbai on the website of CSRC Nanjing Office: http://www.csrc.gov.cn/Csrcsite/gdzgb/nanjing/html/jgdt0306202.htm

By far, the best news report I have read on this Nanjing Xinbai “test” is that on 21 Century Business Herald, June 16, 2003. Its internet address is http://www.nanfangdaily.com.cn/jj/20030616/cj/200306160602.asp

Deng Jiong

—– Original Message —–
From: “Knut Pissler”
To:
Sent: Friday, August 01, 2003 11:07 PM
Subject: RE: fan ben shouxiao AND Nanjing Xinbai

Thanks for your helpful comments on my question!

Regarding the recent discussion on share trading at the OTC-markets through Propery trading centers I would like to point you to a most recently published case (Fazhi Ribao, dated June 25, 2003, p. 12): The state owned shares of Nanjing Xinbai (600682), listed in Shanghai, were quoted for transfer (guapai zhuanrang) at the Nanjing Property Rights Trading Centre, whereby the local office of the CSRC issued an urgend order to terminate this trading acitivies of Nanjing Xinbai.

Another (failed) experiment with trading of illiquid shares?

Knut Benjamin Pissler
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Research associate
Max Planck Institute for Foreign Private and Private International Law
Mittelweg 187
D-20148 Hamburg
+49-40-41900-202
+49-40-41900-288
http://www.MPIPriv-HH.mpg.de