Caixin
Dec 01, 2016 06:50 PM
FINANCE

Share Splits Raise Stock Market Suspicions

(Beijing) — Many investors find stock splits appealing, but China's stock exchanges apparently fear major shareholders and fund management firms may be taking advantage of that appeal for illicit gains.

According to recent announcements filed by companies listed on the Shanghai and Shenzhen stock markets, exchange officials in November surveyed several listed companies about their stock-split projects. The companies were asked whether any of their executives planned to reduce shareholdings after proposing a share split.

Neither exchange has commented on the surveys, nor has anyone been accused of wrongdoing. But the survey itself suggests officials are concerned that stock splits are being used manipulatively to drive share prices higher so that major shareholders can sell shares at a profit after a split.

Speaking to Caixin, fund management industry sources who asked not to be named claimed some privately operated funds and big shareholders — including company executives — have colluded to profit from stock splits, which are also called bonus issues, as well as rumors of stock splits.

Stock-split projects are popular among small shareholders. Although the price of a targeted stock is not immediately affected, the total number of shares in a single investor's portfolio will at least double. And share prices often rise after a split or an announcement of a future stock split due to heightened investor attention.

For example, shares in East Group Co. Ltd., a solar-power and battery-equipment manufacturer listed on the Shenzhen Stock Exchange, jumped by the daily limit of 10% Monday after the company announced a stock-split plan.

A similar spike for the price of shares in Yorhe Fluid Intelligent Control Co. Ltd., a valve producer also listed in Shenzhen, followed a stock split plan announcement on Nov. 17.

Fund management firms with large blocks of shares technically should have no special advantage over retail investors when a stock split occurs. But the sources said some fund managers and company executives have allegedly conspired to spread market stock split rumors during earnings-report periods.

After rumor-mongering, they claim, fund management firms have gone on share-buying sprees in order to boost share prices and attract more retail investors.

Company executives allegedly conspire with fund managers by waiting for prices of targeted shares to rise. The executives then sell their stock and split profits with the fund managers, the sources said.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor Eric Johnson (ericjohnson@caixin.com)

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