China tightens rules on stock incentive schemes

China's Market Authorities, as expected, have been actively "managing" the stock market lately. Today, it has came out with another "market friendly" new rules on stock options plans for executives and major shareholders with the aim to improve corporate governance, curb abuses and reduce market speculation. This new move is the third so far after the Authorities introduced the off market rules and reduction of stamp duty on share transaction weeks ago. So far, the market has reacted positively as it has risen for about 20% from its low of 3,000 points.

Reuters: China's securities regulator has tightened rules on stock incentive plans for executives as it seeks to bolster corporate governance and curb abuses that favoured major shareholders while fanning market speculation. Companies will be barred from making major announcements such as share placements, capital injections or convertible bond issues for 30 days after initiating a stock incentive scheme, the China Securities Regulatory Commission said in rules published in the official China Securities Journal on Wednesday. Similarly, incentive schemes could not be launched within 30 days after a major corporate announcement. Stocks granted as incentives must also not be priced more than 50 percent below the company's average share price during the 20 trading days prior to the announcement of the scheme. China formally endorsed management incentive programmes, which grant executives the right to buy a specified number of shares at a stipulated price, in 2006, but no such schemes have received regulatory approval for nearly a year. "There were many problems in the pilot programme. Some controlling shareholders put together plans that were favourable to themselves, regardless of the interests of smaller shareholders," said Jiang Jianrong, an analyst at Shenyin Wanguo Securities Co. "The new rules are designed to introduce some checks and balances and greater transparency." She expected regulatory approvals of incentive schemes to resume following the adoption of the new rules. The rules require that shareholders with more than 5 percent of a company's shares or a controlling stake get shareholder approval to receive stock incentives. Controlling shareholders are also banned from selling stocks gained through incentive programmes for 36 months. Jiang said the rules would also curb market speculation that had often accompanied the announcement of stock incentive plans, as investors bet that company executives would subsequently make price-boosting announcements for the sake of short-term gains. "With restrictions in place, executives' incentives would be more closely linked with a company's long-term performance," she said.

* News have spread lately that the Authorities may introduce share margin financing in China and short selling of shares soon. If the share margin financing proposal is true, China's market will have another catalyst to push it up further. With regards to short selling, I seriously doubt it will be introduced any time soon.

* Bank of China Ltd., the only yuan clearing bank in Hong Kong, said it raised transaction costs for conversions between the city's currency and the yuan more than sevenfold today; ie from 0.10 to 0.75 percentage point. The new ruling is to curb hot money inflows and speculative demand for yuan. It has been a norm for Hong Kong residents to "double play" in yuan account as it gives higher interest rate and potential capital appreciation.

* OREC - formation has been shelved.