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Economic Watch: China tightens grip on speculative stock-selling by big shareholders
From:Xinhua  |  2017-05-30 22:11

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by Xinhua Writer Jiang Xufeng

BEIJING, May 30 (Xinhua) -- It will no longer be so easy for the millionaire and billionaire shareholders of public companies to use excuses such as weddings, improving living standards, or moving overseas to offload stocks when share prices peak.

In January 2016, China's securities regulator limited anyone who holds more than 5 percent of a company's shares from massive dumping of their holdings.

Compared with individuals investing their savings, major shareholders, supervisors and management enjoy advantages of asymmetric information, so offloading stocks in a fire sale manner annoys the public and cause retail investors to suffer.

The 2016 rules stipulated that major shareholders, supervisors and managers should make public the number of shares, price range and reason for sale. Bizarre reasons like paying children's tuition and purchasing homes soon captured the headlines.

FIXING LOOPHOLES

Some shareholders use the stock market like an ATM to earn quick money, and easily found loopholes in the old rules to profit from selling stocks when prices surged, causing volatility.

The 2016 rules made things more difficult, but some began to sell stocks to institutional investors in blocks and then the institutional investors sold stocks onto the market.

Major shareholders engineered the block trading to circumvent regulations, and some shareholders profit by cleverly timing their sales, Deng Ge, spokesperson for the China Securities Regulatory Commission (CSRC), said over the weekend when the CSRC, Shanghai and Shenzhen bourses came up with the new rules.

"Such disorderly and irregular stock sales led to a very negative impact on investor confidence and the real economy," Deng stressed.

The latest rules aimed to fix some loopholes, as stocks transferred through block trading should not surpass 2 percent of a company's total shares in any 90 days, and the transferees are not permitted to sell any more within six months.

The new rules will slow the pace of offloading, which will stabilize the market and support growth of companies with stable profitability outlooks, said Sun Xiwei, chief investment strategist at CITIC Securities.

The view was echoed by Jin Haitao, a veteran investor, who said that the new regulations accurately targeted at malpractices in the industry and will curb speculation.

"They can help shift some investors' attention from short-term capital gains to the long-term investment value in sustainable businesses," Jin said.

WIDE IMPLICATIONS

The new policies also improved regulation on stock reductions through selling of non-public offering shares, information disclosure, and equity transfers via agreements.

Some analysts including Sun Xiwei at CITIC Securities believe that they will have wide repercussions on business activities like private placements.

Listing is a common exit for institutional investors in China. Unlike public offerings, a private placement refers to a funding round of securities through private offering to a small number of chosen investors, and some Chinese investors offload their shares on the first day they are allowed to do so.

The new regulations is tougher on this. For those who hold more than 5 percent of a company's stakes, their sales of non-public offering shares should not exceed 50 percent of their total holdings in a 12-month period after unlocking.

"The new policies drew on globally accepted practices from advanced economies like the United States, and the more stringent rules can better protect interests of small investors," said Chen Shaoxia, chief researcher with Goldport Capital, a Shenzhen-based asset management company.

To ease worries that the new rules will dampen investors' enthusiasm of supporting innovative companies, the CSRC said that it will give necessary policy support to exits of innovation industry funds' investment that focus on businesses' long-term intrinsic value.

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