China set to reveal flotations framework

CHINA'S State Council is set to announce new rules for the listing of state-owned enterprises abroad.

The move comes against a background of 22 state businesses having recently received permission to float shares outside China.

The Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong are advising on the drafting of the regulations.

The 22 state enterprises given permission to list abroad are the second such group.

Nine companies had previously been given the go-ahead, of which six have listed in Hong Kong.

The six were incorporated under China's existing framework - the Standard Opinion on Joint Stock Limited Companies and the Addendum to the Standard Opinion.

China's new Company Law, effective from July 1, differs from the existing legal framework in several respects.

In an interview with Business Post, the chairman of the Stock Exchange of Hong Kong, Charles Lee Yeh-kwong, said regulations covering the issue of shares abroad would be published by the State Council, which would have the power to do so under the Company Law.

''The idea of the regulations is that the issue of shares overseas will be subject to a different set of regulations to cover the special situation,'' Mr Lee said.

''This set of regulations is to maintain as much as possible the provisions already in the Standard Opinion and the Addendum to the Standard Opinion.

''The stock exchange and the SFC are now working very closely with the State Council on the scope of these regulations, and on the working of these regulations.'' The new overseas listing rules will take the form of State Council regulations pursuant to the Company Law.

''This will actually elevate the status of the existing Standard Opinion and the Addendum. Both are administrative decrees,'' Mr Lee said.

The regulations would retain as far as possible the content of the Standard Opinion and the Addendum.

''I would like to see these regulations promulgated before the middle of the year because the Company Law comes into effect on July 1,'' said Mr Lee.

Before the promulgation of the regulations, new H-share listings would continue to be governed by the Standard Opinion and the Addendum, avoiding any interim gap in the law.

Mr Lee said the exchange was seeking clarification from the Chinese State Tax Bureau on the enterprise income tax rate payable by H-share companies.

All H-share companies obtained special approval from the State Tax Bureau for the preferential tax rate of 15 per cent when they prepared for listing in Hong Kong.

But under the Provisional Enterprise Income Tax Regulations issued last December, all Chinese enterprises, including joint stock limited liability companies, would be subject to a unified tax rate of 33 per cent.

A senior official of the State Tax Bureau said although the preferential treatment to the existing six companies would not be scrapped, the new H-share companies should pay their tax in accordance with the new provisions.

Mr Lee said: ''We are waiting for the publication of the detailed rules for the implementation of the Provisional Enterprise Tax Regulations, so we are not clear whether the State Tax Bureau has the power to reduce tax.

''I was told seven companies, including Yizheng Chemical Fibre, have approval to pay 15 per cent tax. But on whether the State Tax Bureau can reduce the tax rate of the second batch of 22 companies, we are not clear.'' Mr Lee said whatever tax rate the companies had to pay, they had to fully disclose the information in their prospectus under Hong Kong's listing requirements.

He said a 33 per cent tax rate instead of 15 per cent would reduce the after-tax profits of the companies, which would in turn affect the share prices and the values of the companies.

''So our job is to ensure full disclosure, and it is really for the market to rate the company to set the price for the company,'' he said.

''For the existing H-share companies, the key is really whether they continue to pay 15 per cent tax. If this is the case, of course it will not affect their share price. Actually they will have an advantage.

''This is something we are trying to find out from China.''