H-share firms confront the concept of investor relations

THE performance of H-share companies has shown that the challenge of turning China's state-owned enterprises into modern corporations accountable to shareholders is far from over after the listing of their shares on stock exchanges.

Stock market listing imposes stringent demands on management to fulfil its duties to shareholders. The experience of H-share companies reflects the difficulties of adapting from a production unit under a planned economy to the sort of responsive business entity familiar to international investors.

Many of the activities of state-owned enterprises were government controlled. It is thus not realistic to expect these companies to immediately perform as though they were fully fledged business entities in the Western sense and to demand a standard of corporate governance which has only just appeared in Western business literature.

The Chinese authorities recognised the many problems of reforming enterprises and had hoped that stock listings would speed the process. The government also promulgated the Company Law to regulate the behaviour of the enterprises. But many other difficult issues remain to be resolved.

Among the many important tasks for company management is the need to maintain a stable and positive relationship with shareholders.

Such a concept is entirely different from handling an administrative relationship with a government authority.

The importance of maintaining a good relationship with shareholders should not be under-estimated. Shanghai Hai Xing Shipping learnt this the hard way. When it became known that the company's earnings would be hit by interest rate rises last year, the share price fell and investors accused the management of deceiving the market.

A survey of institutional investors in Britain showed they were sceptical about investing in H-shares.

It concluded that 'the pattern established by many Chinese companies - fleeting global roadshow presentations followed by loud silence and, finally, disappointing results - has created enough disillusionment to badly deplete the reserves of goodwill these companies had enjoyed'.

The Chinese authorities also have acknowledged the seriousness of the problem. In a seminar on how to standardise China's enterprises, the chairman of the China Securities Regulatory Commission, Zhou Daojiong ZDJ02, pointed out that one of the key tasks of listed companies was to increase their transparency.

Mr Zhou specifically pointed out that listed companies need to take information disclosure seriously and provide investors with true, complete and timely information in accordance with procedures prescribed by law.

Dissemination of true, complete and timely information is the prerequisite of an efficient capital market. To facilitate communication between listed companies and investors, Daiwa Institute of Research has compiled a handbook for managers of Chinese listed companies to help them discuss various areas of promoting investor relations.

The booklet explores the importance, main medium and the important principles of good investor relations. It also looks at the experience of companies in Hong Kong, Japan and the United States in implementing investor-relations programmes. Finally, it reviews the experience of Chinese companies with the objective of trying to help them map out a model of their own.

It is hoped that our preliminary attempt will gain the attention of Chinese listed companies and serve as a basis for further discussion on promoting the development of investor relations in China.

Kent Chen is research manager of Daiwa Institute of Research.