Photographer: Qilai Shen/Bloomberg

Vanke’s Prolonged Halt Highlights China Hurdles Joining MSCI

Updated on
  • China shares may resume late June or early July, says official
  • More trading halts may follow amid company reorganization

Investors need more time to assess China’s pledge to stamp out arbitrary stock trading halts, MSCI Inc. says. China Vanke Co. is shaping up as a test case.

Vanke, whose mainland-listed shares have been suspended since Dec. 18 pending a reorganization, needs more time to resume trading. The company had earlier said that its trading halt will stay in place until no longer than June 18.

The company will submit a preliminary restructuring plan to the board before June 20, and if that is approved, will propose it to the Shenzhen Stock Exchange, according to a company official who asked not to be named citing the firm’s policy. The Shenzhen exchange will have 10 working days to approve the plan, and trading may resume in late June or early July, the person said. Even so, further “brief” trading halts are likely to follow as the firm finalizes the restructuring plan with a second round of reviews by the board and the exchange in coming months, the person added.

China’s equities on Wednesday were denied entry into the MSCI index for the third time, despite recent regulatory measures to make them more appealing to global investors, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows. The Shenzhen and Shanghai stock exchanges last month published new rules capping trading halts to three months for major asset restructuring and one month during private placements. In rejecting the entry of Chinese stocks into its indexes, MSCI said investors need more time to assess the effectiveness of recent policy changes.

For a QuickTake explainer on the MSCI decision, click here.

Trading suspensions on mainland bourses have been “too long and too self-willed,” and Vanke “has set a very bad example,” said Li Rongzhi, chairman of Baofengyuan Investment Management Co., a Shenzhen-based hedge fund that used to own Vanke A shares. “Chinese firms just suspend trading as they wish. They get to see the cards but you don’t. It’s very unreasonable, and unfair.”

There is a big gap in share suspension between China’s A-share exchanges and overseas markets, said Wendy Liu, head of China equity strategy of Nomura Holdings Inc. Stocks overseas generally can be halted between an hour to a trading day, while in China they can be kept suspended from 10 days to five months, Liu added.

‘Frankly Outrageous’

"This is exactly the kind of issue MSCI is raising," said Fraser Howie, co-author of ‘Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.’ "It’s frankly outrageous, and you can clearly point to this as an example of an abuse of the system and non-market principles."

At the peak of the stock rout that wiped as much as $5 trillion of value last year, China allowed more than half of the total number of listed firms to suspend trading, among unprecedented government intervention.

"The philosophy of equity exchanges overseas is generally efficiency-prioritized, which means consistent trades with ample liquidity should come first," said Shen Zhengyang, a Shanghai-based analyst with Northeast Securities Co. While the overseas stock market is dominated by foreign institutional investors, mainland stocks are driven by retail investors, adding to the factors to be considered in designing rules, Shen added.

Representatives of Vanke declined to comment, citing future regulatory disclosures to be made on stock exchanges.

Vanke shares in Hong Kong, which were suspended for less than three weeks between December and January, fell 0.4 percent to HK$17.06 at the midday break on Thursday, bringing their year-to-date decline to almost 26 percent.

Public Spat

China’s largest developer has been in the middle of a public spat with little-known Baoneng Group, which emerged as its largest shareholder in December. Vanke’s management questioned the credibility of Baoneng and labeled its investment a “hostile takeover.” Earlier this year, Vanke signed a memorandum of understanding with Shenzhen Metro Group Co. to acquire some assets in exchange for shares, a move that could potentially dilute Baoneng’s ownership.

The first step in Vanke’s reorganization will be the vote by the board on the preliminary restructuring plan. Board approval requires supporting votes from more than half of the board members, according to rules last updated in 2014. Vanke’s 11-member board include three representatives from the company, according to its annual report last year.

Once the restructuring plan is approved by the board and the exchange, Vanke will need to call an extraordinary shareholder meeting to vote on the proposal, which will need approval from two-thirds of shareholders in both the mainland-listed A-shares and Hong Kong-listed H shares, the company official said.