China's Cash Crunch Brings a Dead Funding Tool Back to Life

(Bloomberg) -- Plans by two Chinese companies to revive a long-dormant form of equity fundraising have underscored the dilemma facing the nation’s leaders as they try to ease a private-sector cash crunch without sinking the stock market.

The two firms are planning public placements, a type of share sale unused in China since 2014. Their attempted reboot follows last year’s tightening of restrictions on private placements, the hitherto most popular method for listed Chinese companies to sell additional shares. Policy makers clamped down on such deals in part because they were worried a flood of new stock would weigh on the $5.5 trillion market.

While it’s unclear whether regulators will approve the public placements, the proposals highlight how tough it’s become for companies to tap China’s main source of equity financing. Market observers say authorities need to strike a better balance between controlling the supply of new shares and ensuring that companies have access to funding, particularly after a contraction in China’s shadow banking industry left many private-sector companies short of cash.

“If the stock market restores its financing function, it will help companies grow bigger and stronger,” said Lv Changshun, a fund manager at Beijing Dajun Zhimeng Investment Management Co. 


Public placement

Private placement

Investor base

All investors; no limit on the number of buyersUp to 10 investors

Pre-2017 pricing mechanism

Offer price should be no lower than the 20-day average or last close prior to the deal launchFloor price when issuers announce intention to sell shares, typically 1 year before deal is launched; floor price offered at deep discount to pre-deal market price

Post-2017 pricing mechanism

No changeFloor price set on the first day of issuance; no room for deep discounts

Lock-up period

None12-36 months

Underwriting

Hard underwritingNo need to take up unsold shares

Since 2014, additional stock offerings in China have been dominated by private placements. Companies liked the structure because it gave them some say over who was allowed to invest. Money managers liked it because shares were typically offered at a significant discount to the prevailing market price. And investment banks liked it because they weren’t obligated to buy the shares if buyers balked.

But after the value of private placements soared to a record 1.7 trillion yuan ($245 billion) in 2016, regulators turned off the taps. Rules introduced in February 2017 reduced the size of the discount and limited investors from selling shares even after the lock-up period. Private placements this year have totaled just 285 billion yuan, according to data compiled by Bloomberg.

Guangdong Topstar Technology Co., which announced plans in October to pursue a public placement, said in a response to questions from Bloomberg News that it chose the structure because raising money from a private placements had become too difficult under the tightened rules. The company, which hopes to raise 800 million yuan to fund robotics and automation-equipment projects, hired China Merchants Securities Co. to underwrite the deal.

Jiangsu Xinquan Automotive Trim Co., a maker of auto parts that plans to raise 787 million yuan in a public placement to fund the construction of two factories, didn’t answer multiple calls for comment.

The China Securities Regulatory Commission didn’t respond to calls and a fax requesting comment on the deals.

A bigger role for equity financing could help Chinese companies trim their record debt burdens and reduce their reliance on the shadow banking system. While regulators have taken some recent steps to make fundraising easier, including exempting companies from a ban on selling stock more than once in 18 months and trialing a convertible bond program, critics say there’s still more to be done to smooth the process.

“We would see a sharp pick-up in issuance if regulators improve the relevant rules, such as simplifying the approval process, adjusting the pricing mechanism and enhancing investor protection,” said Fu Lichun, an analyst at Northeast Securities. “Public share placements could provide a chance for companies to turn the corner.”

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