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Some Chinese Companies See Rise in Share Prices With ‘No-Loss’ Employee Buyback Promise

By Cao Wenjiao and Leng Cheng

A number of Chinese companies recently gave their employees a deal — buy back company shares with the guarantee that any losses would be covered.

Some companies saw their share prices rise with the employee offer. But some analysts say the no-loss buyback can backfire on companies and isn’t healthy for the market.

Shenzhen-listed Hunan Kaimeite Gases Co. Ltd. launched such on offer on Friday with a four-day deal. Other companies offered similar deals but for different lengths of time.

“The company is undervalued due to recent volatile trading of the market,” according to Kaimeite Gases’ announcement, filed with the Shenzhen Stock Exchange on Friday. “The buyback plan is to boost investors’ confidence, and it’s based on our bullish view on company’s outlook.”

Shares of companies that offered “bailout style” buybacks surged temporarily. Kaimeite Gases surged by the legal daily maximum of 10% to 8.86 yuan ($1.30) on Friday. It closed at 8.98 yuan on Tuesday — the day the employee deal ended. As of May 31, the prices of shares of Kaimeite dropped 26.1% since this year’s peak of 10.94 yuan on Jan. 25.

Shenzhen Fenda Technology Co. and Guangdong Biolight Meditech Co. also saw their respective share prices rise on their employee buyback offers. However, Shenzhen Kingsun Science & Technology Co. saw its shares fall slightly after its notice.

Some analysts criticized the practice as a “bailout style” buyback for struggling companies.

About 100 notices on share buybacks were filed by companies’ major shareholders to A-share markets from June 1 to Tuesday, according to financial data provider Wind Info. By comparison, the number of notices on reducing shares stood at 26 during the same period.

The pace of the recent buybacks was greater than what has been seen overall this year: 575 notices on share buybacks and 569 notices on share reducing were filed on the A-share market, according to Wind Info.

Companies buy back shares in an attempt to make the remaining shares more valuable. But Xu Yang, chief analyst from HuaAn Securities Co., said it is hard to argue that paying for losses is a smart move for the market over the long term.

“Buyback from major shareholders usually provide support on sentiment during market downturns,” Xu said. “But this kind of buyback notice could lead to potential risks of market manipulation.”

A crackdown on speculative trading on the Chinese mainland has led to a wane in interest in small cap stocks, and an increase in blue chips’ popularity.

Wang Delun, a strategist with Industrial Securities Co., told the state-run Xinhua News Agency that such buyback plans are a risky move for small-cap firms, which are trying to stabilize stock price in order to avoid margin calls that kick in when prices hit a certain level.

Margin calls are a broker’s demand for more cash or other collateral from investors when the price of the securities falls to a certain level, which was cited in the stock market meltdown in China in 2015.

Contact reporter Leng Cheng (chengleng@caixin.com)

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