China stock market

Shanghai, Shenzhen stock markets tighten rules on share trade suspension ahead of MSCI review

PUBLISHED : Friday, 27 May, 2016, 8:40pm
UPDATED : Friday, 27 May, 2016, 8:44pm

China’s two bourses are to implement tougher restrictions on voluntary trading suspensions, the policy change coinciding with the annual review by index compiler MSCI on whether to include mainland shares into its widely-tracked emerging markets index.

Chinese authorities have been pushing for the inclusion, as they see it as a platform to elevate China’s status in global stock markets, and as a channel to broaden the use of the yuan.

The Shenzhen and Shanghai stock exchanges both announced regulatory changes that will limit share trading suspensions to a maximum of three months for companies involved in major asset restructuring, and to one month for companies conducting private placements.

“Companies that want to apply for trading suspension longer than three months should hold a board meeting to decide the arrangement. Professional opinion is required from sponsors and financial advisories if the company apply for long term trading suspension,” the guideline issued by the Shenzhen Stock Exchange said.

Both bourses said the new rules are meant to curb stock suspensions at will and are designed to protect the interests of investors.

MSCI will announce its decision on June 15 on whether or not to include mainland shares into its Emerging Market Index, tracked by about US$1.5 trillion of assets worldwide now. An inclusion will require passive index-tracking funds to buy the shares.

This is the third annual review by the index provider since 2013. A free flow of capital in and out of the market, and the beneficial ownership issue have been the major concerns of international investors.

However, new concerns arose last year around the issue of arbitrary trading suspensions. Foreign investors were caught unable to exit stock holdings during a wave of voluntary trading suspension by listed companies during the stock market rout last summer.

The Shanghai and Shenzhen bourses had approved more than half of the roughly 2,800 listed companies which suspended their shares from trading in early July, during a two-week period which saw China’s benchmark stock indexed plunge by 30 per cent from a seven-year high in mid June.

A combined 1,600 companies listed in Shenzhen and Shangahi were suspended from trade as of July 8.

“It is a great concern of overseas-based mutual fund managers that they cannot pull out their investment when the market is going down, which can be very scary,” said Kevin Leung, director of global investment strategy at Haitong International Securities.

Index compiler MSCI had issued a statement earlier that urged Chinese authorities to commit to preventing a repeat of the trading halts seen during last year’s sell-off.

“The Chinese authorities are making an official reply, in which companies are warned against arbitrary trading suspension, or using it as a speculation excuse, and it is a gesture to declare China’s reform commitment,” Leung said.

However, if another stock rout happened, the authorities are still likely to intervene to prevent “systemic risks”, he added.