China Insiders Are Selling Stakes After Mammoth Equity Rally

(Bloomberg) -- Some Chinese executives and large shareholders are cashing out of their companies’ stocks after an explosive start to the year for the nation’s equity market, raising doubts over the sustainability of the rally.

• ZTE Corp.’s Shenzhen-listed shares had soared 59 percent this year, until the telecom equipment maker said Tuesday its controlling shareholder planned to cut stock and buy units in an exchange-traded fund. ZTE slumped 7.8 percent Wednesday, its biggest loss in five months. The stock fell a further 1.5 percent Thursday.
• Hunan New Wellful Co.’s year-to-date advance has been trimmed to 175 percent after the pig farmer said Monday its second-biggest shareholder planned to dump as much as its entire 16 percent stake.
• Wangsu Science & Technology Co. said Monday that four shareholders planned to sell up to 6.4 percent of its total shares. The stock surged 121 percent this year through Friday. It has dropped 18 percent this week.
• Panel makers Tianma Microelectronics Co. and BOE Technology Group Co. are among other hot stocks to announce similar sales. Tianma is one of the year’s top performers on the MSCI Asia Pacific Index, climbing 74 percent even after a 13 percent loss this week.

The ChiNext gauge of technology and small-cap shares, a particularly volatile index, suffered its biggest loss since October on Wednesday, tumbling 4.5 percent in the wake of insider selling announcements. It fell another 2.6 percent Thursday, for its biggest two-day loss since June.

“This will certainly hurt the market,” Ken Chen, a Shanghai-based analyst with KGI Securities Co., said of insider selling. “Some retail money will run for the exit after the shareholders’ plans to cut stakes, and that will deplete the upward momentum in stocks.”

The ChiNext still boasts a world-beating gain of 32 percent this year, thanks to more supportive policies. However, there have been hints that officials don’t want a wild rally, and state media reported that the regulator warned brokers on risks of over-the-counter margin lending. China’s biggest state-owned brokerage also made a bearish call on shares of a state-owned insurer last week, a move interpreted as a sign the government wants things to slow down.

Insiders were already concluding it was a good time to exit, with plans to sell a total 16 billion yuan ($2.4 billion) last week alone, the most since August, according to China Merchants Securities Co. Adding to the timeliness, the ChiNext on Tuesday hit its highest level since May, which was before the bulk of last year’s equity sell-off.

“Many shareholders of listed firms are cash-strapped,” said Shen Zhengyang, a Shanghai-based strategist with Northeast Securities Co. “Now with the stock gains, they can finally cut their holdings and use the money to repay loans.”

Most of the planned sales will probably be done via negotiated transfer, rather than by dumping shares on the secondary market, according to Sun Jianbo, president of China Vision Capital Management in Beijing.

A bigger blow could be felt if the sales affect sentiment among China’s army of retail investors. Some of the transactions have even raised questions at the companies themselves, adding to the potential for a negative reaction.

• Eastern Gold Jade Co., up 27 percent in Shanghai this year, said late Tuesday that its controlling shareholder sold 2.4 million shares last week and that it is looking into the reason for the sale.
• SG Micro Corp., which has climbed 40 percent in Shenzhen, said this month a big corporate shareholder sold 0.1 percent of its total shares without making a disclosure 15 trading days beforehand, violating regulations.
• Changzhou Shenli Electrical Machine Inc., which has gained a more modest 9.8 percent, said Tuesday a shareholder sold some stock without following proper disclosure rules.

Further clues on the market’s direction could come Friday, as focus turns to Premier Li Keqiang’s press conference at the close of the annual National People’s Congress in Beijing.

--With assistance from Cindy Wang.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;Amy Li in Shanghai at yli677@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Christopher Anstey, Will Davies

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With assistance from Bloomberg