China bans listed companies from speculating in emerging sectors

May 13, 2016 18:03
The China Securities Regulatory Commission, led by chairman Liu Shiyu, bans listed companies from raising funds for the purpose of diversifying into the high-tech sector. Photo:

Mainland authorities have issued new measures for the stock market after halting the homecoming of US-listed Chinese stocks.

The China Securities Regulatory Commission has reportedly prevented listed companies from issuing shares to raise funds to invest in the high-flying fintech, virtual reality, gaming and film sectors.

In recent years China has been actively encouraging people to do business creatively and drive innovation in order to restructure and upgrade its economy. However, the new policy incentive has basically poured cold water on that.

Mainland-listed companies are not allowed to issue shares to acquire assets that are beyond their main business focus.

The top securities regulator has issued a notice that listed companies are prohibited from raising funds in order to expand into the above-mentioned four emerging sectors, according to reports from Shanghai Securities News and Beijing News.

For example, a listed textile company is not allowed to issue shares for venturing into the fintech or virtual reality business.

However, the company may face no such restriction if it intends to use the funds to acquire a restaurant chain.

As such, the new move is aimed at preventing a large number of listed companies entering into these emerging sectors amid the market hype.

Local media reports cited unnamed sources as saying that the new policy intends to mitigate the long-standing problem of rampant speculation in the financial market and limited capital flowing into real economy.

The government’s push for innovation and entrepreneurship is in line with the global trend.

However, the policy has been excessively abused by speculators. It’s estimated that more than 120 mainland listed companies have used share placements to move into these four emerging industries.

Most of these companies have seen their market value spike many times over. Traditional sectors like textile, cement and steel have single-digit P/E ratios, and their valuation usually soars to double-digits even if the newly-acquired business fails to generate any revenue.

Many listed companies in traditional sectors have been tempted to follow suit and boost their market valuations. Company management is able to make good profit from compensation, selling shares and other ways if the market capitalization spikes.

Also, demand pushes supply. A number of people have created businesses looking very trendy in order to attract potential buyers from listed companies.

That has created a win-win situation for both sides, and nobody really cares about the real prospect of these businesses.

In fact, a “food chain” centering around these new emerging sectors has already come into place. It has attracted more and more listed companies to deviate from their main business. That might put the real economy at risk in the long term.

Basically, Chinese businessmen are quite short-sighted and would make good things become bad in the end.

For example, the Chinese government intends to attract savings from the private sector into the stock market and help the real economy reduce leverage.

In theory, that's a good idea. However, the booming stock market has led to frenetic speculation.

It’s quite similar to Beijing’s intention to encourage innovation and startups, which later become highly speculative sectors, prompting the authorities to step in.

Various signs show that top Chinese leaders have realized that the financial market can’t achieve healthy development given the general short-sightedness of local investors.

That being the case, they have decided to return to the fundamentals in order to stem risks and prevent bubbles from developing.

This article appeared in the Hong Kong Economic Journal on May 13.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist