China's 1,300-plus listed companies have got the green light to deal with the overhang of state shares after the country's stock market regulator unveiled a detailed circular at the weekend.

Along with the guidelines issued earlier to extend the split-share reform to the whole market, the circular provides companies listed on the A-share market clear guidance on share mergers.

The circular contains many amendments to the draft document the China Securities Regulatory Commission (CSRC) released on August 26 soliciting public opinion.

The circular makes it easier for the reform to be efficiently carried out, the CSRC said in an announcement to the press.

They key points in the circular are:

Approval of only two-thirds of holders of non-tradable shares is needed to launch the reform. For pilot projects, all holders of non-tradable shares must give their consent.

The time taken for a company to complete the reform process has been reduced to 30 days but proposals cannot be changed once trading resumes.

There are specific measures to ensure holders of non-tradable shares fulfill their promises in the reform contracts to retail investors.

Listed companies are required to provide guarantees to holders of tradable shares.

Holders of non-tradable shares are not allowed to transfer their shares to others if they have not completed their pledges unless the transferee is willing and capable of doing so.

Companies or sponsors failing to fulfill their obligations face CSRC censure or even prosecution.

China launched a pilot reform program at the end of April to address the split-share issue, which experts blamed for the stock market slump and a distorted stock pricing system. Two batches of 46 pilot companies had floated state shares by the middle of last month.

Share prices were fluctuating wildly until the revaluation of the yuan.

The Shanghai composite index yesterday climbed 0.62 percent to 1196.22 points, close to psychological barrier of 1200 points. This is about 4 percent higher than in late April when the pilot project began.

More international investors are showing an interest in China's A shares as valuation on selected companies are finally beginning to look reasonable, Ronald Wan, executive director of SBI E2-Capital, a Hong Kong-based investment bank, said.

But Wan added that while the conversion of non-tradable shares was important it was but only a part of capital market reform. Further effort is necessary to improve corporate governance and transparency, and more large capitalization and private sector companies need to be drawn into the A-share market.

"China's stock market reform is going in the right direction," said Lorraine Tan, an analyst with Asia-Pacific Equity Research Service of Standard & Poor's.

However, people have some concerns over the way the reform is being carried out, especially the different treatment between H and A shareholders, Tan added.

Regulators have limited reforms to the A-share market, excluding B and H shares.

(China Daily September 6, 2005)