China's stock transfer

The state, like the Lord, gives and takes away. Russian oligarchs learned the lesson earlier this decade. Now it is China's turn. Beijing this weekend ordered state institutions to transfer shares of listed companies that they own into the social welfare fund.

At first blush, Beijing is simply switching shares from one pocket into another: 826 state-owned institutions, including regional governments, will park part of their holdings into the National Social Security Fund. The amount is equivalent to 10 per cent of the amount each company raised at its initial public offering, a total of $9.3bn. And the edict is retroactive, covering 131 companies that have listed on mainland stock markets since 2005.

But transferring shares without payment raises issues, even when kept within the family. There may be no land grabs or oligarchs tossed into jail, as in Russia, but China is in effect ordering owners to surrender assets for free. This is unusual, even by China's standards. When assets were transferred into China Investment Corp, the sovereign wealth fund paid for them via a complex bond financing.

Furthermore, not all these owners are fully paid-up members of the state. According to the CLSA brokerage, 11 are listed entities – so ordinary shareholders suffer too. The rest are state organisations that may nonetheless have their own joint ventures or projects that they hoped to fund with the shares. The edict also sweeps local government-level funds upwards into the central pot.

The move reinforces the manipulated nature of China's equity markets. Just as more shares are coming on-stream with the re-opening of the local IPO market, so some are being taken off-stream. Shares transferred to the NSSF will be subject to a three-year lock-up. Yet another reminder that investors in Chinese stocks, like Job, need more than a bit of stoicism.

BACKGROUND NEWS Every state-owned company that has listed in China since 2005 must transfer stock equal to 10 per cent of the shares offered to the National Social Security Fund, according to a weekend government edict. A similar requirement already covers listings of Chinese state-owned companies in Hong Kong and has made the state fund the largest institutional investor in the city's stocks. The fund had lobbied for years to have the policy extended to companies listing on exchanges in Shanghai and Shenzhen to shore up fund assets as the share of the population over retirement age grows as a result of the government's one-child policy.

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