Coronavirus prompts boom in risky China share placements
Concerns deals could lead to market manipulation after Beijing relaxes rules More than 100 listed companies in Shanghai and Shenzhen have made private placements in the last month
Looser rules on private share sales in China have prompted a flood of issuance, as cash-strapped companies try to fortify their balance sheets against hits from the coronavirus outbreak. More than 100 listed companies have raised Rmb209bn ($30bn) through private placements since February 14, when domestic regulators relaxed restrictions, according to data provider Wind. That is an increase of more than 800 per cent on the same period in 2019. But some have warned that Beijing’s decision to allow greater leeway for private placements, which involve the sale of often discounted shares directly to select groups of investors, could encourage market manipulation.
“Private placements create ample room for corruption,” said Bo Zhuang, an analyst at TS Lombard in Singapore. Such transactions in China slowed markedly after regulators launched a crackdown four years ago, saying that too many deals led to speculative acquisitions, misuse of funds and even criminality, as some investors colluded with listed companies to inflate share prices.
Prior to the clampdown, funds raised via this channel peaked at Rmb1.67tn in 2016, according to Citic Securities. However, such concerns have taken a back seat as Beijing tries to reboot the world’s number two economy with measures such as debt relief and cheap loans for businesses affected by travel restrictions and forced quarantines. Loosening rules on private placements is designed to help companies “combat the virus and return to normal operation”, the securities regulator said last month. “The virus has taught local firms a lesson that they need to have plenty of cash in hand to cope with ‘black swan’ events,” said Wang Yihe, president of Shanghai-based Yiheyuan Asset Management, alluding to hard-to-predict risks. A “private placement is one of the easiest and cheapest ways to reach that goal”. An official at Shanghai-listed Chifeng Jilong Gold Mining said its decision in March to launch an Rmb1.8bn private share offering was because it was “short on cash”. “A lot of companies are doing this and we don’t want to lag behind,” the official added.
These companies won’t be able to use extra cash to generate a superior return. They are not competitive. Zhang Chen, Tianfeng Tiancheng Asset Management Following the relaxation in rules, companies listed in Shanghai and Shenzhen — home to China’s second-largest stock exchange — can privately place shares with investors at a discount of up to 20 per cent to their trading price. The lock-up period that investors must hold these shares for before selling has been halved from 12 months to six months. Companies listed on ChiNext, a Nasdaq-style board for start-ups, no longer need to meet profitability or debt ratio requirements. Investors have rushed to pick up discounted shares in companies listed in the southern Chinese city via private placements, traders said. Shenzhen’s share index is up 8 per cent this year on hopes of stimulus measures from Beijing, making it one of the few big markets globally to have made gains so far in 2020. But TS Lombard’s Mr Bo believes private share sales do “more to enrich a small group of investors than improve corporate performance.” One common ruse involves majority shareholders selling overvalued third-party assets to the company and then using the proceeds to buy discounted shares through a placement. Some investors are cautious.
Zhang Chen, a portfolio manager at Tianfeng Tiancheng Asset Management in Shenzhen, said that many companies that raise money from private placements are badly run. “These companies won’t be able to use extra cash to generate a superior return,” he said, noting that proceeds are often used to pay back existing debt or invest in unrelated businesses. “They are not competitive.” In January 2017 a Chinese hedge fund manager was jailed for colluding with the controlling shareholders of more than a dozen companies to release favourable information that boosted share prices, before dumping their holdings in block trades from which both parties benefited.