At least 180 Chinese listed companies will be forced to cancel or scale back planned rights offerings worth $97bn in response to regulations that target excessive fundraising used for dubious acquisitions and financial speculation.
The rules come as Chinese regulators are increasingly concerned about the trend of “exit the real, enter the fake” — a phrase used to denote companies abandoning real economic activity in favour of financial engineering. Listed companies invested a record $110bn into passive financial products in 2016 even as fixed-asset investment grew at its slowest pace since 1999.
China’s securities regulator on Friday issued regulations that restrict the use of secondary share offerings through private placements. In addition to financial products, such share sales have largely been used to fund private-equity acquisitions, with investment targets chosen to match investment “concepts” popular with retail investors, even when the target is outside the acquirer’s core business.
Much like company name changes designed to pump up share prices by signalling a strategy shift to trendy businesses such as technology, the acquisitions are intended to attract interest from speculators.
“The secondary private placement has been used by company management as a way to securitise low quality assets so as to cash out. Small investors have been left holding the bag,” said Hong Hao, head of research at Bocom International in Hong Kong.
The strategy of raising shares through listed companies to acquire unlisted ones is especially attractive in China, where the government tightly controls the flow of initial public offerings, and many companies have waited years for approval. Private placements were the preferred method because the rules allow pricing new shares below their current market value.
Last year, 793 Shanghai and Shenzhen-listed companies raised Rmb1.8tn ($261bn) through private placements. Meanwhile, the 227 IPOs in those two exchanges were worth only Rmb150bn, according to data from Wind Information.
The latest rules state that the amount of shares issued through private placements cannot exceed 20 per cent of previously outstanding shares. Companies will not be allowed to conduct private placements if they have already completed a placement within the past 18 months. And non-financial companies that already have “rather large” cash balances or other financial asset holdings will not be allowed to place shares.
Some 178 listed companies have disclosed private placement plans worth an estimated Rmb668bn that appear to run afoul of the first two provisions, according to an FT analysis of Wind data.
The move to curb financial speculation fuelled by secondary share listings is in line with China’s broader focus on curbing financial risks this year. The central bank has guided money-market interest rates higher in recent months in an effort to deflate a bond bubble.
The latest rules are also linked to the government’s medium-term goal of phasing out the approval requirements for IPOs and allowing the market to decide which companies can sell new shares, when they sell and at what price.
The China Securities Regulatory Commission has noticeably increased the pace of IPO approvals in recent months. Analysts say that the agency intends to first reduce the IPO queue, which stands at 619 companies, before deregulating the IPO process. CSRC chairman Liu Shiyu said this month that he anticipated it would take two to three years to go through the latest IPO applicants.
A relatively strong market has eased fears that increased IPO activity will siphon demand from existing shares. But analysts say tightening secondary offerings is in part an effort to rebalance overall equity fundraising towards IPOs while keeping overall volumes in check.
“The scale of private placements over the past two years has been enormous, and growth has been very fast,” said Zhu Bin, tactical analyst at Southwest Securities in Shanghai. “The ‘bloodsucking’ impact on the overall capital markets has been devastating.”