China Shortens Initial Public Offering Lock-up Period to 1 Year

By Zhang Dingmin and Chua Kong Ho

Sept. 5 (Bloomberg) -- China shortened the trading moratorium for investors who buy stakes in initial public offers to one year from three years, a move that may encourage strategic investors deterred by the lengthy lock up.

Companies will also no longer have to halt trading of their shares during annual earnings announcements and profit forecasts, the Shanghai and Shenzhen Stock Exchanges said in statements posted on their Web sites today. Stocks with volatile and ``abnormal'' movements due to speculation will be suspended, they said. The new rules take effect on Oct. 1.

``Shortening the lock-up could make it more attractive for pre-IPO strategic investors,'' said Fraser Howie, a Singapore- based analyst at CLSA Ltd. ``More disclosure is good for the market.''

About 8.7 trillion yuan ($1.27 trillion) of locked-up shares, almost half the combined market capitalization of the two exchanges, will be released in two years through 2010, according to local data provider Wind. New shares, while improving the tradability of a stock, also reduce the value of existing equity.

China's benchmark CSI 300 Index has slumped 59 percent this year, the most of 88 global measures tracked by Bloomberg, as central bank action to cool rising consumer prices deflated a stocks boom that drove equities up sevenfold in the two years to 2007.

The new rules will enable the exchanges to use ``special treatment'' to better protect small investors if controlling shareholders misuse funds or provide unauthorized guarantees to third parties, the two Chinese exchanges said.

``Considerable changes'' have occurred in the stock market and investor behavior since 2006, making a revision necessary, the Shenzhen bourse said on its Web site. ``At the same time, problems such as selective information disclosure and insider trading have stood out.''

To contact the reporter for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net; Chua Kong Ho in Shanghai at kchua6@bloomberg.net