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China Must Solve Three Issues Concerning the GEB
Inadequate regulation causes serious problems at the GEB
By Pi Haizhou | NO. 46 November 17, 2016

 

Zhu Wei, Chairman and General Manager of Broadex Technologies Co. Ltd., poses for a photo in the Shenzhen Stock Exchange on October 12. On that day, Zhu’s company got listed on the ChiNext board of the Shenzhen Stock Exchange

ChiNext, China's NASDAQ-style growth enterprise board (GEB), is now 7 years old since its launch on October 30, 2009. The GEB's achievements are obvious to all, but there are also problems that need to be solved. The GEB has the biggest problems throughout the A-share market, at least in the following three aspects:

First, consider its high price to earnings ratio (P/E ratio), which means companies listed on the GEB are generally overvalued. Compared to mature stock markets overseas, China's A-share market is undoubtedly a market of high valuation, while the P/E ratio in the GEB is the highest across all the boards of the A-share market. By October 27, the average P/E ratio of companies listed on the Shenzhen Stock Exchange stood at 42.9, while that of companies on the GEB was as high as 79.02. Such a high P/E ratio indicates that the GEB is full of speculation, which pushes up investment risks in the market.

Second, the GEB is undermined by serious cases of accounting fraud throughout the A-share market. Initial public offering (IPO) fraud is a malignant practice corrupting the A-share market. This activity has attracted widespread attention from regulators and investors. Companies investigated and punished by the regulatory authority for IPO fraud in recent years include the Yunnan Green-Land Biological Technology Co. Ltd., Wanfu Biotechnology (Hunan) Agricultural Development Co. Ltd., Shenzhen Hirisun Technology Inc. and Dandong Xintai Electric Co. Ltd. Among these four companies, the last three are listed at the GEB.

Third, shares are traded in high numbers immediately after lock-up shares are eligible for trading at the GEB, especially by large shareholders. Because of this, the market has always seen capital outflows, making the stock market more sluggish. To serve such activities, gray deals in various forms as well as tunneling occur frequently.

This kind of stock selling is particularly serious at the GEB because most of the companies listed are private companies, whose controlling shareholders and senior executives tend to sell their stocks after IPOs. Moreover, since the valuation of GEB-listed companies are the highest throughout the A-share market, large shareholders have more incentive to sell their stocks immediately after they become eligible for trading.

In fact, many private companies undergo IPOs with the primary purpose of selling stocks after their locked-up stocks become tradable. Some big shareholders have even sold almost all their shares. This is obviously an irresponsible action to their companies and investors.

An important reason for the pervasiveness of this problem is that there is not enough regulation for the A-share market, and many of the policies in the market are designed for state-owned enterprises (SOEs). This leaves loopholes for private companies listed at the GEB to exploit. For instance, large shareholders of SOEs are not eager to sell stocks, and they are restricted in terms of how many shares they can sell—unlike private companies. Therefore, serious problems at the GEB are caused by inadequate regulation.

How can the situation be improved? The government must give the right prescription.

To address the high P/E ratio, for instance, the government must curb speculation in the market. In particular, the government must take action to impose severe punishments for illegal behaviors such as manipulating stock prices and insider trading.

To fight against IPO fraud, the regulatory authority must take strict measures, ordering the corrupt companies to both exit the stock market and compensate their investors for their losses, so that these companies will not gain from committing fraud.

To restrict stock selling, the regulatory authority should limit the amount of stocks sold by major shareholders each year.

All these steps must be based on the revision of the securities law, which must be pushed forward by the regulator. The delayed revision of the securities law has now become an obstacle restricting the development of China's stock market—this must be solved as soon as possible. Otherwise the sound development of China's stock market, including the GEB, would be mere empty talk.

This is an edited excerpt of an article written by economic commentator Pi Haizhou and published in Economic Information Daily

Copyedited by Bryan Michael Galvan

Comments to zhouxiaoyan@bjreview.com 

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