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Thursday, 27 November 2008
Gome Chairman’s Case Highlights China's Equity Risks
Mystery surrounding a police investigation of the mainland’s richest man over alleged stock price manipulation has highlighted the risks to shareholders from murky disclosure rules for mainland companies.
Mystery surrounding a police investigation of the mainland’s richest man over alleged stock price manipulation has highlighted the risks to shareholders from murky disclosure rules for mainland companies.
Appliance retailer Gome Electrical Appliance Holdings’ shares were suspended on Monday as local press reported that founder Wong Kong-yu, known Huang Guangyu in the mainland, had been “detained” the previous week.
But it was not until Wednesday that police confirmed Mr. Wong was under investigation and on Thursday state news agency Xinhua, citing police, said the probe concerned “economic crimes”.
The confusion even prompted Xinhua to say the media should be kept informed.
“In the face of many rumours, related departments could only answer media questions with ‘we’ve not yet received notification’, which has indeed made people feel lost,” the agency said on Wednesday.
Dramatic disappearances by mainland entrepreneurs show that a well-managed company can survive a scandal, analysts say.
The greater risk to the shareholders, and increasingly, to shareholders in “red chips” listed in Hong Kong, is the practice of long-term, vaguely explained trading suspensions that can leave small investors’ money tied up for months without any way to limit their losses.
“A lot of shares get caught in limbo-land and it’s very frustrating for minority shareholders,” said Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong.
Trading in Hong Kong-listed Gome’s shares was suspended on Monday, but the company has only said it is checking media reports of its chairman’s detention. It cancelled a results conference the same day without giving a reason.
Xinhua said on Thursday that Gome spokesman He Yangqing would make a statement at the start of next week.
“Long-time share trading suspensions are quite common in China, contrary to international practice, where trading generally resumes shortly after corporate announcements,” said Wu Haijun, Shanghai principal at Power Pacific Corp of Canada, a foreign investor in mainland stocks.
“The Chinese practice appears to be spreading to Hong Kong-listed companies with Chinese backgrounds. This is not good for Hong Kong as a mature global equity market.”
Mainland regulators were aware of the problem, analysts said, while jurisdictional limits tie the Hong Kong authorities’ hands.
“It’s a structural problem with PRC [mainland] listings in Hong Kong … Most of the assets are in China and management is in China so there is very little the Hong Kong regulator can do,” Mr. Allen said.
In a recent case in Shanghai, fertiliser maker Yuntianhua suspended shares for nearly eight months, before announcing an asset injection by its parent on November 8.
In the meantime, the Shanghai market had lost half its value, leaving Yuntianhua’s shares to drop 60 per cent in the eight days after they resumed trading.
Mr. Wong has not been formally arrested, nor charged with any crime. Media reports say the investigation is related to a sudden jump of more than 500 per cent in the shares of SD Jintai over a seven-week period in the summer of last year.
Mainland’s corporate disclosure rules have improved since its stock markets began trading in 1990, but the country still lacks rules for how long listed company’s shares can be suspended, or how extensive the disclosure of negative news need be.
“Listed companies’ statements often become ambiguous when they are related to negative news,” said Zheng Weigang, senior stock analyst at Shanghai Securities.
“It’s quite a common practice for companies to apply for a trading suspension in case of uncertain prospects due to negative factors.”
Limited authority to enforce disclosure could pose a problem as more mainland firms list in Singapore, Mr. Allen said.
Shareholder class action rules in the United States meant disclosure was not such a problem there, although mainland companies may face a rash of suits in the first year of listing as they learn the ropes, he added.
Mainland’s recent history is littered with successful entrepreneurs who later ran foul of the law.
In some cases, such as toll road magnate Zhang Rongkun, whose downfall also took down Shanghai’s party secretary Chen Liangyu, the company disintegrates along with the founder.
A more optimistic precedent is the case of retailer Wumart, which has survived the jailing of founder Zhang Wenzhong, said Russell Flannery, compiler of the Forbes list of the wealthiest people in the mainland.
“The key is whether or not the person running into trouble has delegated day-to-day operations to management,” he said.
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Gome Chairman’s Case Highlights Equity Risks
Reuters in Shanghai and Beijing
27 November 2008
Mystery surrounding a police investigation of the mainland’s richest man over alleged stock price manipulation has highlighted the risks to shareholders from murky disclosure rules for mainland companies.
Appliance retailer Gome Electrical Appliance Holdings’ shares were suspended on Monday as local press reported that founder Wong Kong-yu, known Huang Guangyu in the mainland, had been “detained” the previous week.
But it was not until Wednesday that police confirmed Mr. Wong was under investigation and on Thursday state news agency Xinhua, citing police, said the probe concerned “economic crimes”.
The confusion even prompted Xinhua to say the media should be kept informed.
“In the face of many rumours, related departments could only answer media questions with ‘we’ve not yet received notification’, which has indeed made people feel lost,” the agency said on Wednesday.
Dramatic disappearances by mainland entrepreneurs show that a well-managed company can survive a scandal, analysts say.
The greater risk to the shareholders, and increasingly, to shareholders in “red chips” listed in Hong Kong, is the practice of long-term, vaguely explained trading suspensions that can leave small investors’ money tied up for months without any way to limit their losses.
“A lot of shares get caught in limbo-land and it’s very frustrating for minority shareholders,” said Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong.
Trading in Hong Kong-listed Gome’s shares was suspended on Monday, but the company has only said it is checking media reports of its chairman’s detention. It cancelled a results conference the same day without giving a reason.
Xinhua said on Thursday that Gome spokesman He Yangqing would make a statement at the start of next week.
“Long-time share trading suspensions are quite common in China, contrary to international practice, where trading generally resumes shortly after corporate announcements,” said Wu Haijun, Shanghai principal at Power Pacific Corp of Canada, a foreign investor in mainland stocks.
“The Chinese practice appears to be spreading to Hong Kong-listed companies with Chinese backgrounds. This is not good for Hong Kong as a mature global equity market.”
Mainland regulators were aware of the problem, analysts said, while jurisdictional limits tie the Hong Kong authorities’ hands.
“It’s a structural problem with PRC [mainland] listings in Hong Kong … Most of the assets are in China and management is in China so there is very little the Hong Kong regulator can do,” Mr. Allen said.
In a recent case in Shanghai, fertiliser maker Yuntianhua suspended shares for nearly eight months, before announcing an asset injection by its parent on November 8.
In the meantime, the Shanghai market had lost half its value, leaving Yuntianhua’s shares to drop 60 per cent in the eight days after they resumed trading.
Mr. Wong has not been formally arrested, nor charged with any crime. Media reports say the investigation is related to a sudden jump of more than 500 per cent in the shares of SD Jintai over a seven-week period in the summer of last year.
Mainland’s corporate disclosure rules have improved since its stock markets began trading in 1990, but the country still lacks rules for how long listed company’s shares can be suspended, or how extensive the disclosure of negative news need be.
“Listed companies’ statements often become ambiguous when they are related to negative news,” said Zheng Weigang, senior stock analyst at Shanghai Securities.
“It’s quite a common practice for companies to apply for a trading suspension in case of uncertain prospects due to negative factors.”
Limited authority to enforce disclosure could pose a problem as more mainland firms list in Singapore, Mr. Allen said.
Shareholder class action rules in the United States meant disclosure was not such a problem there, although mainland companies may face a rash of suits in the first year of listing as they learn the ropes, he added.
Mainland’s recent history is littered with successful entrepreneurs who later ran foul of the law.
In some cases, such as toll road magnate Zhang Rongkun, whose downfall also took down Shanghai’s party secretary Chen Liangyu, the company disintegrates along with the founder.
A more optimistic precedent is the case of retailer Wumart, which has survived the jailing of founder Zhang Wenzhong, said Russell Flannery, compiler of the Forbes list of the wealthiest people in the mainland.
“The key is whether or not the person running into trouble has delegated day-to-day operations to management,” he said.
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