Date
18 October 2017
CSRC chairman Liu Shiyu warned that those who use illegal funds for buyout deals could face jail time. Photo: China.com
CSRC chairman Liu Shiyu warned that those who use illegal funds for buyout deals could face jail time. Photo: China.com

Securities regulator lashes out at leveraged buyout deals

China Securities Regulatory Commission chairman Liu Shiyu delivered a strongly worded speech during a meeting of the Asset Management Association of China.

He lashed out at asset managers who are acting like“barbarians at the gate”, using “public funds” or “improper money” to engage in leveraged buyouts.

This kind of behavior “challenges the bottom line of our country’s financial laws and regulations”, he said.

“Some financial institutions are corrupting the professional ethic. They are examples of the retrogression and decay of human nature and business morals.”

Liu warned asset managers against becoming ‘‘evil monsters’ or “poisonous pests” of the industry.

”When you are challenging the nation’s financial laws and regulations, the gate of prison, not the controlling stake, is waiting for you,” he said.

Liu’s harsh remarks were not published on the CSRC website. Several mainland online media outlets carried the full speech, but it was taken down shortly.

It is widely believed that his diatribe was aimed at several private insurance groups involved in high-profile A-share takeovers recently, such as Baoneng Group’s bid for China Vanke Co. Ltd. (02202.HK, 000002.CN) and Anbang Insurance Group Co. Ltd.’s acquisition of China Minsheng Banking Corp. Ltd. (01988.HK, 600016.CN).

These hostile takeovers are in essence about challenging poorly managed firms to boost their business and share price performance.

As such, these deals are not necessarily illegal or unreasonable.

We’ve seen plenty of examples of such takeovers in developed markets like the United States, Europe and Hong Kong.

The problem is the way these high-risk deals are being financed: The players don’t use their own capital but put their clients’ money on the line, e.g. funds from insurance policies sold to individuals.

For example, if a property developer has an affiliated insurance firm and use that to raise funds through sales of insurance products, and later funnel the money to bid for a rival, such a deal could boost its property business provided the hostile buyout is a success.

But it is also highly risky for those insurance clients as lofty prices for shares are often paid in these deals.

Liu’s warning might send a chilling shock to these insurance groups.

The recent strength of Chinese equities has a lot to do with these hostile takeover attempts.

Financial institutions involved may have to behave themselves now that Liu has made it clear the authorities are not too happy about such deals.

That means A shares could lose some of their momentum despite the launch of the Shenzhen-Hong Kong stock trading link on Monday.

This article appeared in the Hong Kong Economic Journal on Dec. 5.

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal columnist

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