More than 50 companies are ready to merge their tradable and non-tradable shares, said economist Liu Jipeng, one of the architects of China's stock market, in an interview with China Daily.

The first batch of pilot projects will probably be chosen from this list and approval granted by the China Securities Regulatory Commission (CSRC) in the near future, he said.

This reflects the will of both the central government and the companies' enthusiasm for reforming the existing share structure of the domestic stock market, Liu said.

As a transitional move in the reform of state-owned enterprises, companies in the A-share market only have about 40 percent of their shares traded among institutional and private investors. The rest are held by the State and are therefore non-tradable.

Having two classes of shares is a fundamental cause of the lack of development in the capital market over the last four years, according to Liu, who has helped list many of China's joint stock companies.

On April 12, CSRC officials announced that the conditions are right for launching pilot projects to merge both types of shares. Many economists have expressed their agreement with this decision.

The first set of firms to get the green light from the CSRC are most likely to be companies burdened with few state shares, Liu said. Of the 1,400 or so listed companies in the A-share market, 480 fall into that category.

These companies are aware of this so they are the ones most actively working on their share-merging plans.

Merging traded and non-tradable shares eliminates the existing division between two classes of shareholders with different, if not conflicting, interests, Liu said.

As shareholders gain greater control of companies, their share prices will gain value at a higher rate than those of companies subject to the old share division system, Liu explained.

According to data compiled by the Shanghai Stock Exchange, at the end of 2004, the total capitalization of tradable shares on Chinese stock markets was 1.2 trillion yuan (US$140 billion), while Chinese companies listed on overseas stock markets, from New York to Hong Kong, had a total capitalization of 2.2 trillion yuan (US$260 billion).

Liu pointed out that while companies in developed economies rely on capital markets for around 50 percent of their funds, companies in China still rely on banks for more than 95 percent of their financing.

He criticized some overseas analysts for saying it would make no difference where a Chinese company was listed, whether at home or overseas.

"By saying this, they were just trying to promote business for their own companies," he said. "If China does not have a strong and healthy capital market, its economy will suffer from many problems."

Since 1999, China has made two major share-merging attempts but they both failed. The first was in 1999, when companies were allowed to sell their State shares at less than 10 times their price to earnings ratio.

In 2001, another attempt was made to sell some State shares at an initial public offering price, which also caused the market to tumble.

The reason that both attempts failed, Liu said, is because they were both initiated by the Ministry of Finance and both aimed at using the proceeds to replenish the State sector pension fund, with no accompanying protection for existing shareholders.

But this time will be different, he told China Daily. The top leaders of China's financial system have conducted two years of research after the failure of the previous share-merging attempts. Companies and existing shareholders will be given much more room to work out their plans and negotiate terms.

(China Daily April 20, 2005)