New rules to protect small China investors

New rules to protect small China investors

Friday, Jan 03, 2014

Esther Teo

The Straits Times

Mr Feng Jianjun has been dabbling in the Chinese stock market for more than 10 years and has been racking up losses. He blames this not on his bad luck or poor judgment but on the inadequate protection given to retail investors like him.“The Chinese stock market requires high capital but gives low returns. It’s not transparent and with the lack of information, you never know when prices might fall again,” said Mr Feng, 45, who works in the aluminium industry and has lost up to 40 per cent of his 100,000 yuan (S$20,900) investment in the stock market.

His concerns are shared by other small investors who face rampant stock market irregularities such as market manipulation, insider trading and falsified disclosures in China’s unruly stock market.

But the nearly 90 million individual investors who have accounts at the Shanghai and Shenzhen stock exchanges have got a boost recently in the form of a new set of guidelines aimed at strengthening the protection of smaller players.

Unveiled last Friday by the State Council, China’s Cabinet, as part of a slate of reforms in recent years, the measures include making controlling shareholders financially liable for certain investor losses, boosting dividend payouts and increasing voting rights for small shareholders.

Market middlemen, such as underwriters and others involved in bringing a stock to market, are also responsible, while fund managers and trustees could also be held responsible if found negligent.

These changes cover aspects that retail investors are most worried about, said Mr Deng Ge, a spokesman for the China Securities Regulatory Commission.

These aspects include investment returns and the right to participate in the decision-making process of the firms they invest in, and the new measures will be a milestone in the development of the country’s capital market, he added in a statement posted on the commission’s Twitter-like Sina Weibo account last Friday.

Observers say the moves are long overdue given that retail investors contributed around 81 per cent of China’s stock market turnover in 2012.

The changes are also expected to develop China’s capital market further and bring broader long-term benefits to the world’s No. 2 economy such as relieving the upward pressure on home prices and reducing the risks that banks carry in their business loans segment.

Mr Li Daxiao, director of research at the Shenzhen-based Yingda Securities, told The Straits Times that the changes are the most far-reaching reforms so far in terms of protecting the rights of investors.

Coming from a high-level government body, it is also more likely to be effectively implemented, he added.

Analysts say the guidelines will have positive knock-on effects.

For instance, boosting transparency will help pave the way for China’s initial public offering (IPO) market.

The suspension – the eighth since the establishment of China’s stock market in 1990 – was a way to support prices as Shanghai stocks plunged in late 2012. But it has harmed the financial system as Chinese firms are unable to tap the capital market to fund their expansion plans.

Restoring investor confidence in stocks as an asset class could also benefit the economy in the long run.

Professor Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology, told The Straits Times that speculative capital in real estate can return to proper channels like the stock market instead.

“It doesn’t mean home prices will fall, but a developed capital market that people have confidence in can have the effect of taking the speculative heat off the property sector,” he added.

Reinvigorating the stock market could also help reduce Chinese firms’ overdependence on bank loans for fundraising, said OCBC China economist Tommy Xie.

“Chinese firms can raise capital by listing instead. It’s a way to protect the banks from being overexposed to non-performing loans in the event that the economy slows,” he said.

The Shanghai Composite Index still hovers at around the same level as that in 2000 despite China’s gross domestic product having more than quadrupled in the same period.

Cash dividends paid by Chinese listed companies also accounted for just 25 per cent of their profits from 2001 to 2011. The proportion is usually 40 per cent in developed overseas markets, a People’s Daily article reported in October last year.

But experts are optimistic that the new policies might help give the market – and, in turn, its investors – a lift.

Said Mr Li: “I believe these changes can help investor confidence return and restore the stock market’s vitality.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: