By Alberto Forchielli and Michael Zheng (Mandarin Capital Partners)
November 8, 2010 is a milestone date for the Chinese stock market: PetroChina’s restricted shares, valued at 1.89 trillion yuan ($280 billion), were made tradable. The country’s largest oil and gas producer said the 157.5 billion shares, held by the parent company: China National Petroleum Corp, have been freely tradable from November 8, three years after its IPO in the Shanghai Stock Exchange. The huge amount of additional tradable shares did not cause price pressure. At the opposite, PetroChina’s stock price rose 1,25% on November 8, while the Market Index rose 0.96%. PetroChina has had since its IPO, the largest theoretical market capitalization in the Shanghai stock market, (approximately 2 trillion yuan), but its truly tradable market capitalization, was only 2% of the total, i.e. 40 billion yuan up until November 8. The tradability of the PetroChina’s stock marks the beginning of a new era for China stock markets. Since November 8, all tradable shares account for over 70% of total listed shares, underscoring the success of the reform, started in 2005, to convert non-tradable share into tradable ones.
Before 2005, most shares of Chinese stocks were non tradable. The owners of the non-tradable shares were usually big SOEs’ (State Owned Enterprises). The owners of tradable shares were public investors. Non-tradable Shares could not be bought or sold in the market. Majority shareholders had no incentive to drive up the share price, unlike public investors, mostly retail, whose interest was linked to share price. The cost of the non-tradable shares was usually as low as 1 yuan per share, while the cost of tradable shares equaled market price: this cost disparity was discriminatory toward public investors. By 2005, not more than 30% of shares were tradable vs. 70% today. As there is a 3 year lockup period imposed on controlling shareholders of newly Iisted companies, it is obviously impossible to have a “100% tradable” market so long as there are on-going IPO activities. But now management needs to maximize earnings and share price.
In the short term, whether share are tradable or not, could not make much difference, because in the end the State is the owner no matter whether its shares are deemed tradable or not. But in the long term this reform lays the background for further and gradually reducing the role of the State in the economy. History, theory and experience have taught us that the most effective privatization programs of SOEs’ worldwide have been the ones who were carried out gradually allowing in the end eventually only a “Golden Share” in Governments’ hands. It is not easy to predict a course of action for China, but we have no reason to think that shareholdings will not mutate in the future with the need for global scale and greater market liquidity and in the end we can say that the 2005 reform lays the foundation for China stock markets international expansion. The most obvious next move are the “International Board” due to open in Q1 2011 and the free convertibility of the RMB.