Why is Beijing declaring war on stock market ‘crocodiles’ now?
Authorities are worried about tycoons pulling strings behind the scenes
The collapse of a highly leveraged, 3 billion yuan (US$436 million) takeover bid for a Shanghai-listed animation company this month shone a spotlight on a shadowy corner of China’s stock market that is worrying the authorities in Beijing.
The bidding vehicle, Longwei Culture and Media, was set up in Tibet in November by wealthy actress Zhao Wei and her husband Huang Youlong with registered capital of just 2 million yuan. A month later, it offered 3.06 billion yuan for a controlling, 29 per cent stake in Zhejiang People Culture (ZPC), a former property developer that now produces cartoons.
The Shanghai Stock Exchange asked the two companies to explain where the funding was coming from after ZPC made the bid public, causing its share price to rally. The answer from Longwei, released via ZPC, raised even more questions: Zhao and Huang were proposing to pay 60 million yuan from their own pockets, with 1.5 billion yuan borrowed, with no collateral, from Yinbixin, a trust investment firm based in Tibet, and another 1.5 billion yuan borrowed from an unidentified bank, using the ZPC shares as collateral.
Mainland law is silent on leveraged takeovers – even ones with a sky-high leverage ratio of 50, as in the proposed ZPC deal – and there are no rules preventing trust companies from funding them. That’s made such opaquely financed deals quite common, leading to big price swings, increased market volatility, massive profits for a few and big losses for retail investors.
But such deals have alarmed and angered the government in Beijing, which saw its credibility damaged by a stock market rout in the summer of 2015 that wiped about US$5 trillion off the market’s capitalisation and undermined the country’s financial security. Now, as the leadership prepares for a big reshuffle at the top of the Communist Party later this year, the authorities are digging deeper into fishy deals to bring “big crocodiles” – tycoons who pull the strings behind the curtains – to account and root out potential sources of financial instability that could also have political implications.
