Refinancing rules to spur buybacks

An investor looks at share prices at a brokerage in Fuyang, East China's Anhui province.[Photo/For China Daily]

Central regulators greenlighted refinancing for China's A-share companies late last week, in a move to encourage buybacks.

The China Securities Regulatory Commission, the Ministry of Commerce and State-owned Assets Supervision and Administration Commission jointly released a guideline on Nov 9 to expand the financing channels and simplify the implementation process for companies' buyback plans.

Buoyed by the new guideline, the benchmark Shanghai Composite Index gained 1.22 percent to close at 2630.52 points, while the Shenzhen Component Index was up 2.4 percent to close at 7832.29 points.

The guideline specified that A-share financial companies can provide stock option incentive plans to employees with the repurchased shares.

Public securities firms are allowed to carry out employee stock ownership plans via asset management and trust models.

Listed companies are encouraged to issue preferred stocks and convertible bonds to provide financing for their buybacks. Public companies that have already repurchased their shares will be exempt from an interval restriction for refinancing.

Companies can buy back their stocks if their prices have dropped below their net asset value per share, or have seen their prices drop by 30 percent within 20 trading days.

According to Shanghai-based market information provider Wind Info, there were a total of 372 A-share companies which had seen their prices fall below their net asset value per share by Friday. Most of them come from traditional industries such as property, steel, infrastructure, public utilities and finance, according to Wing Info.

Among the 118 stocks that have listed since December last year, 18 have seen their prices contract over 30 percent so far this year, Wind Info said.

The new guideline also stipulates that public companies are encouraged to introduce buyback mechanisms in their articles of incorporation, to improve communication between management and shareholders.

Shanghai-based Wonders Information, Jiangxi Fushine Pharmaceutical and Wuxi Honghui New Materials Technology all announced buyback plans on Nov 11, shortly after the guideline was released.

Essence Securities said the A-share market has registered a total of 2,867 buybacks between 2010 and 2018. Among those, 1,597 were passive buybacks used for stock incentives while the rest were active buybacks.

The situation will change significantly with the new guideline, according to Essence Securities.

Guosheng Securities said active buybacks will hopefully bring in additional capital of over 100 billion yuan ($14 billion) into the A-share market in the near future.

Based on the past few months, the pharmaceuticals, chemicals and engineering industries have registered the most active buybacks, and that will not change soon, according to the securities firm.

A-share listed companies have accelerated their buybacks this year. According to Great Wall Securities, there were a total of 853 A-share companies that had adopted buybacks by October, totaling 32.9 billion yuan.

Only 565 companies repurchased shares last year, with the value coming in at 9.2 billion yuan