The Shanghai Stock Exchange has launched a crackdown on credit risk in relation to the controlling shareholders and actual controllers of its listed concerns.
The measures recently unveiled by the SSE target three key areas in particular:
i) Controlling shareholders that have pledged high percentages of equity – leading to liquidity risk should share prices tumble;
ii) The use of “inappropriate asset transactions” to obtain large amounts of cash from listed concerns.
iii) Misappropriation of funds and guarantees in breach of regulations.
The move arrives following the launch of a heavy-handed deleveraging campaign by the Chinese central government in 2017, that aimed to forestall systemic financial risk by reducing debt levels.
The Paper reports that a significant number of controlling shareholders in Shanghai-listed companies have pledged a high percentage of equity, leading to repayment risk should share prices fluctuate.
The proceeds obtained by key shareholders from the pledging of these equity stakes have in many cases been used to engage in speculation on capital markets instead of productive investment, exacerbating the problem much belaboured by China’s financial regulators of funds “eluding the real and pursuing the empty” (脱实向虚).
According to official data from SSE there are around 150 companies whose controlling shareholders have pledged equity of more than 80%, while just under 50 are considered to be high risk cases.
SSE has sent letters to the relevant shareholders of companies considered to be high risk, and says that it will summon them for discussions based on circumstance, as well as called for them to take measures to pragmatically reduce pledge-related risk.
SSE has also addressed the pledge-related risk issues of some companies directly, including Geo-Jade Petroleum (600759.SH), Zhongan (600654.SH) and Xintong (600289.SH).
The second area targeted by the SSE involves controlling shareholders or actual shareholders cashing out of listed companies via “inappropriate asset transactions.”
These transactions usually involve an exorbitant price for run-of-the-mill assets that are unrelated to the operations of the company, as well as, the payment of large sums of cash and a counter-party that is oftentimes a hidden affiliate of the shareholder in a listed concern.
The SSE cited the example of a company that produces and sells dyed textiles, which purchased assets held by the controlling shareholder at a near eight-fold mark-up price. The targeted assets were unrelated to the primary business of the listed concern, and brought it no ostensible benefit.
The final area targeted by the SSE’s crackdown is misappropriation of funds, of which there have recently been several prominent cases, including that of Baoqian (600074.SH) and Tianye (600807.SH).