Following the success of a pilot project, the remaining 40 companies listed on the SME Board of Shenzhen Stock Exchange will start the merger of split shares soon and complete the process by the end of next month, according to sources close to the bourse.

The Shanghai and Shenzhen stock exchanges and China Securities Depository and Clearing Corporation yesterday released a document on ways to implement the reform and what the companies need to do.

The news cheered the market with the Shanghai Composite Index surging 1.8 per cent to 1194.31 points on turnover of 22.4 billion yuan (US$2.77 billion).

Also perking the market up was a report in Oriental Morning Post which said that Shang Fulin, chairman of market regulator China Securities Regulatory Commission, had agreed to a proposal that new funds be allowed to be raised on the SME Board in Shenzhen within the year.

There are 50 SMEs listed on Shenzhen and 10 were selected as pilot firms to float non-tradable shares in June.

The 10 SMEs were able to deal better with the overhang of non-tradable shares than large State-owned enterprises because they were more flexible in deciding compensation to holders of tradable shares, said Zhang Weixing, chief analyst at Beijing-based Alliance Investment Consulting Co.

Investors also have high expectations of compensation terms in the 40 SMEs because of the generous agreements in the pilot project.

On average, the 10 pilot companies offered holders of tradable shares 3.81 shares for each 10 held, much higher than the average of 3.13 shares for the 46 firms involved in the Shanghai and Shenzhen pilot projects.

Moreover, the shareholder structures of SMEs are simpler as most of them are privately-controlled companies; and do not need approval from State asset supervisors, Zhang said.

The companies were also flexible in dealing with holders of tradable shares. Nine of the 10 pilot firms adjusted their compensation proposals after discussions with investors.

Qualified foreign institutional investors (QFIIs) and fund managers are keen on listed firms with all tradable shares.

Statistics late last month show QFIIs were among the top 10 shareholders of four pilot listed companies. ABN AMRO Bank, Merrill Lynch, HSBC and Lehman Brothers had snapped up large amounts of shares of listed firms in the pilot project.

The 50 SMEs in Shenzhen reported good performance for the first half of the year.

The average income was 377 million yuan (US$46.5 million), 16 per cent higher than the same period last year.

(China Daily September 8, 2005)