Date
18 November 2017
China's A-share market suffered steep losses on Monday, led by firms that had been targeted earlier by insurers for large stake acquisitions. Photo: Yibada
China's A-share market suffered steep losses on Monday, led by firms that had been targeted earlier by insurers for large stake acquisitions. Photo: Yibada

China insurer targets suffer quick reversal on policy concerns

Baoneng Group was rarely in the media spotlight in China in the past. But all that changed a year ago when the mainland firm launched a hostile takeover bid for top developer Vanke (000002.CN) through an insurance arm.

Since the bold move in December 2015, Baoneng’s aggressive investment style has served as the model for other insurance groups.

Numerous insurers have copied Baoneng’s strategy of identifying companies with no major shareholders and launching aggressive bids for large stakes, ramping up the share price within a short period of time to achieve huge profit.

But China’s top securities regulator, Li Shiyu, recently expressed concern at such acquisition bids, pointing out that the deals could involve the use of improper funds.

This prompted the insurance regulator, China Insurance Regulatory Commission, to quickly weigh in.

Last week, the top insurance watchdog suspended the related business of Foresea Life Insurance, one of the active players, raising serious doubts about the share price prospects of popular target counters.

Over the past few months, companies that insurers laid their hands on often saw their share prices spike, in turn attracting a huge following in the market and pushing up share prices even higher.

Now, the policy crackdown has led to a widespread selloff of this group of stocks, including bluechip companies like Gree Electric Appliances (000651.CN), China State Construction Engineering Corp. (601668.CN) and Vanke.

Gree slipped 6 percent Monday afternoon, pushing it down 20 percent from the recent top. China State Construction Engineering fell 5 percent, bringing the cumulative loss to about 17 percent from recent high. Vanke displayed a similar pattern.

While insurers saw their book profits quickly vaporize, some individual investors hoping to get a free ride did worse as they typically chased the rally at higher price levels.

With the Hong Kong and mainland markets getting more connected after the launch of Shenzhen-Hong Kong stock link, the first thing that investors eyeing cross-border stocks should bear in mind is this: the trading style of Chinese players is often very different and sometimes improper, and one must be prepared for the risks of a sudden policy clampdown.

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RC

EJ Insight writer

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