Foreigners face muddled China equity ownership rules

Investors admit that regulations over foreign ownership of Chinese firms' shares are unclear as to the size of stakes allowed. The problem comes from interpretation of the rules regarding A shares and H shares.
Foreigners face muddled China equity ownership rules

Foreign fund managers with holdings in Hong Kong-listed mainland companies remain confused as to whether buying more shares in the same listed A-share firms could contravene China’s ownership rules.

Current rules state an individual foreign investor can own at least 10% of a China-listed stock, while collectively non-mainland investors can hold 30% of a company’s A shares.

While the question so far is theoretical, some fund managers noted that current rules meant they would avoid buying more than the equivalent of an A+H combined shareholding of 9.99% in a listed Chinese company.

And this would be a sensible approach given that rules from Chinese regulators have yet to cover such an issue, said Jeffrey Mak, partner at law firm DLA Piper.

“From the regulations I cannot find any exemption, so my advice would be to basically just follow the 10% foreign ownership restriction,” said Mak. “You may say that there are no specific rules, but it would go against the spirit of the underlying regulations. It will be quite easy for the regulators to say that you have breached the relevant restrictions.”

But while this remains a theoretical question, other fund managers remain unconcerned given that it is unlikely to be an important practical issue.

“I think for many investors, it’s not a concern for practical reasons,” said Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Investment Partners. “People would always be judging how much flexibility you have in an investment and what it means by holding a substantial amount of shares in terms of voting.

“To be honest, if you buy 9.99% of a company, it’s already really concentrated from a diversification perspective. You don’t want to be too risky in one single stock anyway, even before the rules.”

Besides, said another fund manager who declined to be named, having greater ownership in Chinese listed companies, especially state-owned firms, may not necessarily grant investors more say in how the businesses are run.

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