Caixin
Dec 03, 2016 05:42 PM
POLITICS & LAW

CSRC Head Slams ‘Bandit’ Firms Raising Funds Improperly for Risky Investment

(Beijing) — Borrowing money from unsuspecting investors to fund risky acquisitions makes a company a “bandit,” Liu Shiyu, chairman of the China Securities Regulatory Commission, said at a meeting held by China’s Asset Management Association in Beijing on Saturday.

This is the first time the CSRC has publicly expressed disapproval of highly leveraged purchase of listed company stock, which makes use of funds from small investors, such as people who buy banks’ wealth management products.

The most contentious recent example involves Baoneng Group, a small real estate developer in the southern city of Shenzhen, which bought a quarter of leading home builder China Vanke’s stock despite opposition by its top executives.

Much of the 43 billion yuan ($6.2 billion) it used for the acquisition was made up by premiums received by its insurance subsidiary and funds from bank wealth management products, according to Caixin’s previous investigation and material Baoneng revealed subsequently.

Using funds received in a questionable manner makes companies “bandits of the industry” more than “barbarians at the gates” — an expression that Vanke’s founder and CEO Wang Shi used to describe Baoneng — Liu said. He did not name specific companies.

The remark signals the regulator’s intention to clamp down on such acquisitions, but the CSRC alone could not do the job because it requires coordinated action by the banking and insurance regulators.

But it’s clear that the CSRC disapproves of the practice of using small investors’ money for leveraged equity investment. It is important that people who provide funds for such investments understand the risk and can afford the potential loss, Liu said.

Some companies have ignored this principle, however, by selling investment products to the public without properly informing them of the risk involved. They think of this practice as “financial innovation,” but it’s not, Liu said.

Contact Wang Yuqian (yuqianwang@caixin.com); editor Kerry Nelson (kerry@caixin.com)

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