Angang New Steel Co. (HK: 0347) is likely to become the first company with shares traded in Hong Kong, or H shares, to move to float its over-hang of nontradable shares.

The company’s announcement that it has started preparation for nontradable share reform is set to test international investors’ reaction to China’s market modernization and may cool investors’ appetite for mainland stocks.

"If these companies simply don’t compensate their H-share holders, that will bring a negative impact to their future fundraising activities in Hong Kong or in other international markets,"said Shen Zhengming, an analyst at Orient Securities in Shanghai.

China is moving to list the two-thirds of the total shares of listed Chinese companies that are nontradable, and often in government hands.

While the mostly domestic holders of mainland-traded, yuan-denominated Class-A shares are being compensated for the enormous influx of stock into the market, holders of other share classes can expect to be left holding the bag.

Earlier this month, China’s Class B shares, or foreign currency-denominated stock traded on the mainland, plunged on confirmation that investors holding them won’t be receiving any compensation for potential losses that could occur due to the share-reform program.

Although Angang’s share-reform plan is still unclear, analysts said they see slim chances for its H-share holders to get the same compensation as their A-share counterparts for the influx of new stock on the market.

Trading in Angang New Steel’s A and H shares was suspended Monday. On Friday, its A shares rose 4.8 percent to 4.34 yuan (US$0.54), while its H shares ended down 2 percent at HK$3.90 (US$0.50).

Analysts said they expect the extended reform to bring uncertainties to the domestic stock market.

(Shenzhen Daily October 18, 2005)