In an unprecedented move, Shanghai and Shenzhen stock exchanges yesterday published a list of 189 publicly traded companies with a total of 33.6 billion yuan (US$4.2 billion) misappropriated by big shareholders and affiliates.

 

The disclosure, published in the China Securities Journal, an official securities paper, is widely seen by the investment community as the strongest indication of the exchanges' resolve to shore up corporate governance of listed firms at a time when the liquidity-driven stock market rally is gathering momentum.

 

The list came two days after the China Securities Regulatory Commission (CSRC) issued a notice ordering misappropriated money at publicly traded firms be repaid at a faster pace.

 

"Publicizing names of the companies has the effect of marketizing funds being misappropriated. In other words, these companies are now put under market pressure as, for instance, they would find their loaning credit reduced," said Hu Ruyin, a senior researcher at the Shanghai Stock Exchange.

 

Judicial measures are being considered by the Supreme Peoples' Court to bring criminal charges against those who embezzle funds of publicly traded firms, said Hu.

 

The CSRC notice released on May 29 stipulates that all companies must have their misappropriated funds repaid by the end of the year and companies that have misused funds under 10 million yuan (US$1.25 million) must do so by the end of June.

 

Those companies unable to repay in cash must produce assets or equity stakes, said the notice. And those who refuse to pay back debts could be sued by the boards of listed firms.

 

As of the end of May, 189 companies accounting for 14 percent of all domestically listed firms still had funds misappropriated by their big shareholders and affiliates, according to a joint statement by the two exchanges yesterday.

 

They include well-known companies such as Guangdong Kelon Electrical Holdings Co, Hunan Jiugui Liquor Co, Shanghai Electric Power Co and Hangzhou Iron & Steel Co.

 

In the first five months of this year, 212 mainland-listed companies were repaid misappropriated funds and 77 obtained partial repayments, valued at 11.2 billion yuan (US$1.4 billion) in all and accounting for 25 percent of all misused funds, said the statement.

 

Most of the funds repaid are small amounts and were repaid in cash, according to a survey by the China Securities Journal.

 

"The ongoing repayment programmes work like asset restructuring and improve the quality of publicly traded companies," said Wu Jianxiong, a stock analyst with the Guotai Jun'an Securities.

 

"They help produce speculation opportunities for the stock of small-capped companies in highly competitive industries," added Wu.

 

The stock of some poorly performing companies have seen active trading recently, driven by speculators who bet on profit-taking opportunities from the companies' asset restructuring or debt repayment programmes churned out at a quicker pace to facilitate share reform.

 

Abuse of funds of publicly traded companies has been a long-standing issue in China's stock market. It could take the form of cash misuse or inter-group transactions and may not appear in the companies' financial statements.

 

(China Daily June 2, 2006)