China’s economy is showing little sign of recovery, with the stock market remaining sluggish and the Chinese Communist Party (CCP) implementing various measures to support it. The CCP recently released what it called the “strictest ever” new rules on reducing holdings, prohibiting many companies’ major shareholders from reducing their holdings and blocking various “creative” reduction methods like divorce-related reductions. Experts analyze that this approach is akin to a desperate remedy, and even if the current stock market crisis is weathered, the lack of a market economy in the long term will lead to China’s economic collapse.
Following the release of the guiding document “Nine Articles for the Capital Market” in April to strengthen stock market regulation, on May 24, the CCP’s China Securities Regulatory Commission further announced the “Interim Measures for the Management of Share Reduction by Shareholders of Listed Companies” and the “Rules for the Management of Shares Held by Directors, Supervisors, and Senior Management Personnel of Listed Companies and Their Changes.” These rules regulate the reduction of holdings by major shareholders of listed companies, imposing obligations for major shareholders to disclose their offerings before reducing holdings through bulk trading, effective from the date of publication.
The “Reduction Management Measures” consist of 31 articles, explicitly stating that controlling shareholders and actual controllers cannot reduce their holdings through centralized bidding or bulk trading in cases of stock price collapse, violation of net asset ratio, failure to meet dividend standards, and other circumstances.
The linkage between reductions and dividends has attracted attention. Wind data shows that among the companies listed on the A-share market for at least three years (listed before 2021), their net profits remained positive between 2021 and 2023, with a total annual cash dividend amount of zero.
According to Wind data, approximately half of the over 5,000 companies listed in Shanghai or Shenzhen are actually subject to the restrictions of the new rules mentioned above.
Professor Sun Guoxiang from the Department of International Affairs and Business at Taiwan’s Nanhua University told Epoch Times, “The implication is that the major shareholders in mainland China are now not allowed to dispose of their stocks in any way.”
He said, “The so-called strictest new rules for reducing holdings indicate that a portion of the ‘Nine Articles’ has failed, and it also shows that the CCP’s confidence in stock market management is insufficient. This new rule merely postpones the timing of a time bomb detonation.”
Xu Zhen, a veteran in mainland China’s capital market, told Epoch Times, “Currently, the overall economy is declining, and there is immense pressure for stock market stabilization. By restricting major shareholders and preventing them from reducing their holdings, also known as locking positions, the China Securities Regulatory Commission refers to this as stabilization, to prevent stock prices from falling.”
Affected by the weak economic recovery, the Chinese mainland stock market continues to perform poorly, with the Shanghai Composite Index briefly falling below 2,700 points in February this year. The CCP has implemented a series of market support measures, including harsh penalties for short selling, restrictions on selling, lowering the stock trading tax, and slowing down new listings, but the effect has been unsatisfactory. The Shanghai Composite Index has only slightly rebounded, hovering around 3,100 points. On May 24, it fell below the 3,100-point mark.
Economic scholar Li Hengqing commented to Epoch Times, “Now, if major shareholders were to sell off in one go, it would definitely drag down the entire stock market. The goal now is to maintain at 3,000 or 3,100, which is a critical target set by Wu Qing, Chairman of the China Securities Regulatory Commission.”
The Chinese stock market is in a slump, with general pessimism prevailing. Leo, a private equity fund manager in China who has been bullish on the stock market, now advises, “My suggestion is, now that this rebound has come, sell quickly, even if you have to cut your losses, it’s best to do it early.”
In recent years, the phenomenon of major shareholders of listed companies reducing their holdings has intensified, with significant reductions in the scale of stock holdings. Wind data shows that in recent years, the scale of reduction by major shareholders of listed companies has ranged from around 400 billion yuan to 700 billion yuan, with the number of shares reduced in 2020 being 42.275 billion shares, amounting to 707.279 billion yuan. In 2021, the numbers were 32.519 billion shares, amounting to 611.33 billion yuan, and in 2022, they were 32.218 billion shares, amounting to 495.011 billion yuan. Major shareholders of listed companies reduced their holdings by 24.076 billion shares, totaling 399.680 billion yuan in 2023. Since 2024, 556 listed companies on the A-share market have had their important shareholders reduce holdings.
Li Hengqing explained, “Why reduce holdings? It’s to evade future risks when the stock price is relatively high, to quickly reduce and escape first. If you restrict selling in so many ways, but in China there’s an old saying, ‘Not afraid of thieves stealing, but afraid of thieves planning.’ They are always thinking about selling, always thinking about fleeing, so they will find ways to escape despite all controls imposed.”
In recent years, headlines about “Company Chairman of Bangyan Technology ‘Technically’ Divorced After Only One Year of IPO” and “Shanghai Hugong Stock Continuously Hit the Limit Up, Controlling Shareholder Applies for Divorce” on divorce-related cash-outs have frequently appeared in reports. According to “Caijing,” in 2023, a total of 11 A-share listed companies issued announcements about major shareholders’ divorce.
Li Hengqing said, “Now, these investors or business people are feeling pressured. They fake a divorce, claiming joint ownership of assets as a couple, then get divorced, divide the assets, transfer them to the wife’s name, and then sell. So now, this practice is also prohibited.”
Another feature of the revised “Reduction Management Measures” is to prevent circumvention of reductions, specifically listing out various “creative” reduction methods like technical divorces and margin reductions.
The latest “Reduction Management Measures” by the CCP’s China Securities Regulatory Commission are dubbed the “strictest new rules on reductions in history” within the industry, elevating previous normative documents to regulations.
Since 2020, when the CCP prohibited major shareholders of listed companies from reducing their holdings with the document “Special Provisions on Share Reduction by Shareholders of Listed Companies’ Venture Capital Funds,” further regulations on “Further Regulating Share Reduction Behavior” were issued on August 27, 2023. On September 15, 2023, the Chairman of the listed company Dongfang Fashion was arrested for reducing the company’s shares by 3.4 million shares through bulk trading (involving 22.032 million yuan). This marked the first A-share company to be penalized.
Li Hengqing said, “Governing with the laws of a free market economy is too slow. What to do? Just send the Deputy Minister of Public Security and his team to the Shanghai Stock Exchange to catch people. Once arrests are made, everyone becomes afraid. They say you can only buy and not sell. If you dare to sell, you will be caught. In this case, it’s more of solving a case rather than doing business. It’s no longer a capital market; so, there is no market operation. At this point, it’s like a sick person trying a desperate remedy.”
“If you depart from a free market economy, even if you pass through this stock market crisis, without a market economy, there is no market to speak of. The core of the stock market is free exchange. If there is no free exchange, if you can only buy and not sell, how can the stock market thrive? Without an active stock market, the capital market vanishes, rendering the Chinese economy collapsed.”
Sun Guoxiang believes, “Currently, especially looking at the A-share market, whether it’s selling, trading privately, circumventing reductions, and so on, may all negatively impact confidence or trust in China’s stock market, significantly worsening the already delicate state of the Chinese economy.”
“On the other hand, it also indicates the CCP’s insufficient confidence in managing the current stock market. That is to say, the Chinese stock market seems somewhat precarious, leading to the introduction of more stringent interim measures.”