FINANCIAL REGULATION
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China stock market

Chinese regulator sets sights on stocks with bonus payouts

Some amounts ‘unprecedented’, even in the scope of global stock markets, as he puts the practice directly under the regulatory radar

PUBLISHED : Monday, 10 April, 2017, 5:14pm
UPDATED : Monday, 10 April, 2017, 10:13pm

Liu Shiyu, chairman of the China Securities Regulatory Commission, told a conference over the weekend he plans to target Chinese publicly traded companies that have been offering bonus share schemes.

He warned delegates at the representative meeting of The Association of Chinese Listed Companies, against what he said he called was effectively speculating on stocks, through paying exceptionally large numbers of bonus shares.

He called some payouts “unprecedented”, even in the scope of global stock markets, and suggested that from now on he was putting the practice directly under his radar.

The offer of bonus stocks has increasingly been exploited by some Chinese publicly traded firms, particularly smaller ones, as a way of ramping up their share prices and helping major shareholders and speculators sell stocks for high prices to retail investors.

Stock prices have been seen to surge on the announcement of planned bonus stock payouts, as small investors view them as a sign of confidence delivered by major shareholders on fast earnings growth in the future.

“This is consistent with Liu’s style of encouraging value investing and cracking down on speculative trading,” said Wei Wei, a Shanghai-based trader at Huaxi Securities.

“Many such deep-rooted forms of excess are being eradicated under his leadership.”

Unlike cash dividends, bonus stock payouts actually retain company profits for reinvestment and do not enlarge share capital levels, despite increasing numbers of outstanding shares.

This is consistent with Liu’s style of encouraging value investing and cracking down on speculative trading. Many such deep-rooted forms of excess are being eradicated under his leadership
Wei Wei, a Shanghai-based trader at Huaxi Securities

The most generous bonus stock payouts was first put forward by Beijing Kunlun Tech in 2015, when the online game provider proposed offering 30 such stocks for every 10 held, actually quadrupling its outstand shares. The stock is now 67 per cent less valuable than its 2015 peak, after quickly more than tripling in number within two months.

Nine listed Chinese companies unveiled similar plans in their 2016 financial reports, including East Group, Beijing Tongtech and Linewell software. All the three stocks tumbled by the 10 per cent daily limit on Monday on Liu’s comment.

The former banking veteran who was named head of the securities regulator early last year, has quickly earned the reputation for being tough on market malpractice.

His harsh criticism of insurers’ bidding for controlling stakes in big-name listed companies, for instance, led to the ban of billionaire Yao Zhenhua – who owns Foresea Life Insurance – from entering the industry for a decade.

Liu also recently vowed to pursue “barbarians” and “crocodiles” preying on the nation’s financial markets at the expense of retail investors.

Liu encouraged listed companies to pay cash dividends as real returns to investors, instead of bonus shares, calling those unwilling to part with their cash in such ways as “iron roosters”, he told the conference, and that he planned to get “tough” on the issue.

“Consistent and steady cash dividend payouts are often signs of stability for listed companies’ balance sheets and business operations.” Liu said.

“On the contrary, it may be accounting falsification or a signal of control by insiders, if companies haven’t a rationale for not paying dividends for long.”

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