Summary

As the restrictions on share sales in A-share listed companies via stock exchanges by major shareholders came to an end on 8 January 2016 after a six month lifespan, Chinese regulators have implemented subsequent rules in order to maintain market stabilisation efforts. Despite the continuation of the overarching policy, the rules apply controls to share sales which are substantively different to those imposed by the previous restrictions.

Background

The Chinese stock market dropped by over 30% in early summer 2015. In accordance with one of its fundamental principles, to maintain an equitable market, the China Securities Regulatory Commission (CSRC) issued a set of restrictions on share sales by large shareholders on 8 July 2015 under Notice Number 18 on Shareholding Reductions by Major Shareholders, Directors, Supervisors and Senior Management of Listed Companies (the Restrictions). Referred to as creating a ‘lock up’ mechanism, the Restrictions prevented sales by Chinese or foreign investors holding a total of 5% or more of an A-share listed company from trading on stock exchanges in order to allay a major share sell-off in the Chinese market by preventing investors from reducing major shareholdings. Under the Restrictions, shareholders continued to be permitted to reduce holdings via other methods such as hedging. The prohibition to sell under the Restrictions expired on 9 January 2016. 

The later enacted Provisions on Shareholding Reductions by Major Shareholders, Directors, Supervisors and Senior Management of Listed Companies (the Rules), which subsumed the place of the Restrictions, became effective on 9 January 2016, the day preceding the expiry of the Restrictions. This approach was taken in order to achieve continuity in the anti-sell-off system that the measures create. The Rules do however substantively differ from the Restrictions, with the sales bar in the Restrictions on investors holding 5% or more of the listed company lapsing and new measures being implemented requiring pre-disclosure of share sales and mandating new share reduction limits. 

Under the Rules, shareholders who control the entity or who have a stake of 5% or more must pre-disclose share sale plans 15 trading days before the intended stock exchange sale, allowing minor holders to offer shares in the market in advance, thus increasing share availability and correspondingly decreasing prices before major holders are able to sell. In order to comply with the Rules, sellers must provide a number of details in the pre-disclosure document, including the reasons for the disposal. 

Restrictions are also placed on major shareholders to prevent them from reducing their total shareholding in any three month period by an amount which exceeds 1% of the exchange-listed entity’s total shares.

Comment

Given that the Chinese stock market tumbled once more in the first week of this year, dropping twice by over 7% per day and thus twice triggering the recently implemented trading lock mechanism, most observers have agreed that the Chinese government should continue with intervention efforts for the time being. However, the degree of governmental control that is necessary is being widely debated. Despite some concerns having been raised regarding the intervention risk arising from central involvement, sentiment has been predominantly positive in response to the new Rules. Fears over the implications of a potential delay between the expiry of the Restrictions and the implementation of the Rules, which would have resulted in share sales by major shareholders being temporarily permitted during this period, have been extinguished. 

It remains to be seen whether the Rules will indeed help to sustainably calm the Chinese stock market. It is to be expected that the Rules and their practical effect on the market will remain under constant supervision. Notably, the 7% per day trading lock mechanism, which has been widely regarded as counterproductive, has already been abolished, demonstrating the flexibility of the Chinese government’s trial-and-error approach, and evidencing their willingness to knock some of the measures on the head at short notice.