Getting Listed not PanaceanIn late April, the Shanghai Narcissus Electric Appliance (PT Narcissus) was delisted, the first such case in China's 11-year stock history.A month later, the flurries that swept the market at the time of the delisting announcement have dispersed. But re-examination of the situation is yet to be done to cast light on the company's plight. Once a prestigious brand, Shanghai Narcissus was a model of Shanghai's household appliance industry. In 1993, it was listed in Shanghai. The hefty amount of capital it pooled from the stock market helped it expand its market share steadily and enter its prime time in the mid-1990s. But soon it went downhill. Failure in joint venture investment, poor research ability in developing new products, and a mountain of irredeemable debts pushed it to the wall. By early 2001, it has registered huge losses for the fourth consecutive year. According to the delisting rules set by the China Securities Regulatory Commission, it was forced to exit from the market in late April. The strike-out of the Narcissus is not a chance event. As a State-owned enterprise, Shanghai Narcissus has failed to establish an effective corporate governance mechanism in its transition from an order-receiving firm to a market-oriented one. Without the prop-up of efficient corporate governance, getting listed to pool money can simply give it temporary glory, but cannot ensure its fate for good. The problem of Shanghai Narcissus exists, to a varied extent, in many State-owned enterprises that have been listed. They seem to have established a framework of modern governance mechanism in accordance to the requirement of the market. In reality, however, pooling money is more important to them than corporate reforms and they operate somewhat in the old way. In this way, they take the stock market as a money machine and the stock market fails to effectively function as a force adapting listed companies to market criteria. This is, to some extent, attributable to the twisted understanding of the function of the stock market. The establishment of the stock market in the early 1990s was initially thought to be a means to channel in capital for State-owned enterprises to ease their capital strain. At that time, China was transforming its economy from a planned economy to a market-driven one. The State-run enterprises had to conduct reforms to make themselves adaptable to the market. In this process, they hit the snag of capital shortage. Then the stock market came to their rescue. By 2000, more than 400 billion yuan (US$48 billion) has been pooled through the stock market to replenish listed State-owned enterprises. The money has played an irreplaceable part in State firms' technical upgrading, equipment purchase and other vital expenditures that are indispensable for their healthy growth. Backed up by stock capital, many State firms have grown into powerful and competitive conglomerates. Among them is the Shanghai Petrochemical Company Limited (SPC). In 1992, the firm was still struggling to pay out its debts. In 1993 it was listed and only four years later, it slashed its debt-liability ratio from 75 per cent to 42 per cent. By the end of the first half of 1999, its total assets amounted to 22 billion yuan (US$2.7 billion). But not all listed State firms can perform so well as the SPC. Statistics show that for those listed State firms that went public before 1994, the average return on net assets ratio has been sliding from 14.6 per cent in 1994 to 2.4 per cent by 1999. If they slide further, they will face the danger of loss-making. Given the preferential treatment the State has granted to listed companies, their poor performance is inexcusable. For example, statistics indicate that in 2000 about 10 per cent of the listed companies were exempted all the taxes due and less than 10 per cent of the firms pay their taxes in full under relevant preferential tax policies towards the listed firms. Although they have been listed for years, those companies still cannot establish an effective corporate management mechanism. The board of directors and the supervisory committee have been set up, as all listed companies are required to do. Only they do not function effectively when it comes to making key decisions concerning the company's long-term development strategy. The loose management partially comes from the fact that for many State firms, market pressure is not so pressing as to galvanize real reforms in their corporate structure. Of all the stocks, about two thirds are State-controlled shares, which cannot be floated freely according to relevant regulations. With continual listing of new State firms, the number of State shares will increase accordingly. The unfloatability of State shares means that there will not be real annexation of badly performing firms. Without the threat of being bought out, those firms will not be motivated to take real measures to improve their management. The money they got from their initial public offerings in the stock market can lubricate their development for a while, but cannot maintain their growth momentum for years. In this circumstance, it is inevitable that they have gradually slid to the position of underdogs in the market. It signifies that although great achievements have been made, there is still a long way to go before the State enterprises can fully adopt the modern corporate mechanism. To go to the stock market will not be the answer for their inveterate problems if they do not conduct serious reforms on their corporate structure. Source: China Daily |
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