Date
13 December 2017
Construction and infrastructure firms could be among the beneficiaries of a back-door stimulus program from Beijing. Photo: Bloomberg
Construction and infrastructure firms could be among the beneficiaries of a back-door stimulus program from Beijing. Photo: Bloomberg

Preferred shares: Beijing’s back-door stimulus?

Big publicly-traded Chinese state-run enterprises have begun flooding the market with billions of dollars in new preferred shares after Beijing’s recent reforms allowed such fund-raising. The trend initially looked like a way to recapitalize the nation’s major banks, many of which are sitting on mountains of problematic infrastructure loans made during China’s massive economic stimulus during the global financial crisis. But the trend has just taken an interesting twist with word that a major construction company is planning its own massive preferred share issue to raise up to US$4.8 billion.

While banks almost certainly need the new money to bolster their balance sheets as they prepare to write down billions of dollars in bad loans, it’s far less clear why China State Construction Engineering Corp (601688.CN) might need this US$4.8 billion in new financing. It’s also unclear who exactly would buy all these new preferred shares of companies that hardly look like attractive investments in the current climate.

In answer to the first of these two questions, China State Construction Engineering has said it will sell up to 300 million preferred shares to raise money for new infrastructure projects and to boost its own balance sheet. As to who will actually buy the shares, my guess is that major state-owned investors will fork over most of the cash, acting under orders from Beijing.

Preferred shares are often described as a hybrid between stocks and bonds. Shareholders receive a fixed yield on their stock, but they don’t get any voting rights and the shares aren’t tradable on the open market. China State Construction’s new preferred share issue comes shortly after two of the nation’s top four lenders, Agricultural Bank of China (1288.HK; 601288.CN) and Bank of China (3988.HK; 601398.CN), announced separate plans to issue US$13 billion and US$16 billion in preferred shares, respectively.

Anyone looking at the big fund-raising targets must be starting to think that all this new money flooding into these big state-run companies looks a bit like an economic stimulus plan, especially if Beijing is ultimately buying most of these preferred shares. Beijing has repeatedly denied that it plans to launch anything like the formal 4 trillion yuan (US$650 billion) stimulus plan that it rolled out at the height of the financial crisis in 2009 and 2010.

Still, it’s interesting to note that all the companies now lining up to issue new shares are core drivers of economic activity, just as China’s economy is starting to stumble. The big state-run banks were the major financiers of new infrastructure spending that kept China’s economy afloat during the global downturn, and China State Construction Engineering is one of the nation’s largest builders of such infrastructure.

From the perspective of a company news watcher like myself, an interesting question is what does all of this mean from a stock buyer’s perspective. If I were such a stock buyer, my first instinct would be to stay away from any company that is now issuing these new preferred shares. That’s because companies receiving the money are likely to waste most or all of it on state-ordered projects, many of which may end up as duds. When that happens, however, the preferred share issuers will still need to keep paying interest to holders of those shares.

That doesn’t mean there’s no potential investment opportunity here, as it does appear that a lot of new money may soon be coming into the market via this kind of back-door stimulus. In this instance, second-tier infrastructure builders and their suppliers look like potential beneficiaries of a new round of building.

Such companies could include building materials suppliers, construction machinery makers and mid-sized engineering firms. Those companies won’t get burdened by having to issue their own preferred shares, but instead could get a nice bump in new business working as subcontractors for all the lead builders and lenders who are funding this new back-door stimulus.

Bottom line: Big state-run banks and infrastructure firms are likely to raise billions of dollars in the new few months, as part of a Beijing backdoor stimulus plan that could benefit mid-tier infrastructure-related players.

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RC

A commentator on China company news and associate professor in the journalism department of Fudan University in Shanghai. Follow him on his blog at www.youngchinabiz.com.

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