MORE flexibility, or more protection? In most cases, they are at the expense of each other. China's Yizheng Chemical Fibre Co today will test the system by which Chinese companies listed abroad enlarge share capital. Instead of calling the fund-raising exercise a conversion of A shares into H shares, which is something of a taboo in China, Yizheng proposes to issue an additional 400 million H shares to raise about $1 billion. Chinese companies, incorporated under the already-obsolete Standard Opinion, or the existing Company Law, will find themselves restrained from issuing more shares. Unlike their Hong Kong counterparts, Chinese companies have the same number of issued shares and registered shares. This means whenever they want to embark on equity financing by issuing more shares, they have to convene an extraordinary shareholders meeting to secure approval to issue more shares. Hong Kong companies, whose authorised share capital is usually larger than their issued share capital, are not required to have any shareholder meetings, as long as they have secured a general mandate. Of course, the approval of the general mandate has to be won before they can exercise their authority. But the Hong Kong system provides listed companies with more flexibility as long as they issue less than 20 per cent of the total issued shares a year. As the Chinese companies are short of working capital, and plagued by a credit squeeze, it would be no surprise to see more follow Yizheng's footsteps. Equity financing is one of the advantages of being listed on an exchange. What concerns foreign investors is whether their interests are protected under China's legal regime governing securities. Hong Kong and Chinese securities regulators will argue that the onerous procedures, and the stringent requirements for quorum and shareholders approval will provide more protection to shareholders. However, one point is worth noting that the protection mechanism should not deter Chinese companies from raising funds for normal business expansion, provided plans are beneficial to future development.