Shenzhen bourse suspends trading accounts of China Evergrande units on ‘abnormal’ behaviour

China’s largest property developer’s hedge-fund style stock trading behaviour triggers regulator intervention

PUBLISHED : Friday, 11 November, 2016, 8:41pm
UPDATED : Friday, 11 November, 2016, 11:02pm

The Shenzhen Stock Exchange (SSE) said on Friday it has suspended the share trading accounts of units under China Evergrande Group, the nation’s largest property developer, for “abnormal trading behaviour”.

Evergrande and its affiliated companies have been snapping up publicly traded stocks of other companies on the secondary market. This short term trading activity, including Evergrande’s accumulation of a bigger stake in rival Vanke, were defined as “abnormal” and called out by the regulator. The accounts these companies use to trade shares have been suspended.

“Abnormal trading behaviour of accounts under the Evergrande Group has been severely affecting the trade volume and share price of Vanke,” the announcement said.

Shenzhen listed Vanke, another major domestic property developer, has been fighting a hostile takeover from emerging insurance company Baoneng since last year.

Evergrande joined the battle after it bought 161.9 million Vanke shares between August 16 and November 9, boosting its stake to 8.3 per cent.

Evergrande, controlled by Chinese billionaire Hui Ka Yan, is one of the most indebted developers in China’s property industry with a net gearing ratio of about 430 per cent at the end of June.

However, it has been on a debt-funded buying spree since last year, acquiring land plots all over China, and has also invested heavily in the soccer club business, seen as a politically correct move in China as president Xi Jinping is a big soccer fan. Recent media reports said Hui would sponsor the salary for Marcello Lippi, the newly appointed Chinese national team coach, whose annual salary is reported to be as much as 20 million.

Separately, Evergrande has also been engaged in short-term speculation of some stocks including Zhejiang Dongliang New Material and Integrated Electronic Systems Lab, the stock exchange announcement said.

“The SSE has been taking action on these accounts by adopting close monitoring, raising warnings in both verbal and writing form, requested a compliance promise letter from the account owners and suspended trading of some accounts during intraday trading,” the announcement said, without giving details of which transactions were suspended and how long the suspension would continue.

The SSE announcement also said it had issued a query letter to Evergrande, urging it to state the purpose for holding the stakes in other companies, and it would examine if information disclosure has been sufficient.

Adam Xu, a mutual fund manager with Shanghai based Guotai Fund, said the stocks that were overweight in Evergrande’s portfolio were likely to be restricted from trading after the SSE action.

“While the action taken against its trading and holding of Vanke is even more subtle, Evergrande is just in the middle of the stake holding tussle of [Vanke],” he said.

Ahead of the SSE action on Friday, China’s insurance regulator issued an unusual warning for Evergande to stop making use of its insurance unit as a slush fund for trading assets.

The China Insurance Regulatory Commission (CIRC) summoned Evergrande Life Insurance, the life insurer under the Evergrande Group, and “explicitly expressed its unsupportive stance” about its speculative, short-term trading of stocks, according to a statement on the regulator’s website on Tuesday.

Vanke shares jumped 8.6 per cent in Shenzhen on Wednesday, the most in more than six weeks, after Caixin magazine reported Evergrande and other investors may have further boosted their holdings in the Chinese real estate developer.

Little-known Baoneng Group holds a 25 per cent stake, still the largest shareholder of Vanke