Chinese Companies Ask Employees To Buy Their Stock, Promise To Cover Losses
by Tyler Durden
ZeroHedge.com
Jun 9, 2017
Just when we thought there were no surprises left in the world’s foremost incubator of “financial engineering” that is China, we got a stark lesson in never underestimating China’s market manipulating ingenuity.
According to Caixin, around two dozen Chinese companies recently offered their employees a deal: buy company shares while guaranteeing that any losses would be covered.
While employees think they may be getting an unbeatable deal – who can say no when your employer promises you all the upside and no downside – the reality is that any participants in such scheme are merely locking in their fates with that of their soon to be insolvent employer, who desperately needs to raise the price of their stock to fend off collateral calls on stock-backed loans usually made by founders and other major sharehholders.
As Reuters points out, attracted by guarantees that their principal is “safe”, workers have eagerly stepped up to take advantage of the “offer” even as it remains far from clear how these guarantees would work, with employees in some cases being asked to buy shares and hold them for at least 12 months. Details aside, many of the companies that resorted to this drastic stock price manipulation were quickly rewarded and saw their share prices spike.
The entire farcical episode is reminiscent of what happened in 2015 when China’s stock bubble grew exponentially, then burst just as dramatically. At the time, there were similar efforts, but then it was the government appealing to major shareholders’ patriotism to buy and hold shares in what Beijing said was as a battle against speculators, both domestic and foreign. This time, with the proposal centered entirely on the private sector, the motive is different and is the result of companies using their own stocks as loan collateral, a practice that according to Reuters’ estimates has quadrupled in China over the past two years, and which is driven mostly by founders and major shareholders posting large batches of stock as loan collateral in recent months.
Fundamentally a ponzi scheme, this works without a glitch during rising markets but falling prices especially among small and mid-cap companies, have eroded the value of that collateral, raising the specter of forced liquidation – where lenders, often Chinese brokerages, make borrowers sell the pledged shares. Selling the stock adds more pressures on share prices, triggering a downward spiral.
Shenzhen Fenda Technology, a maker of speakers and electronic accessories, was among the first to encourage staff to buy shares one week ago. At the end of March, Xiao Fen, the company’s chairman and top shareholder with a 44.5% stake, or 416.4 million shares, had put up 84% of his holding as collateral for a loan, the company said. It did not say what the loan was for. Trading in the company’s shares was suspended in late December pending a reorganization, but resumed in mid-April, when the stock price slumped to near their 2015 market crash low. Last Friday, Xiao promised any employee who bought shares in the company by June 6 and held them for at least a year would be shielded from losses.
What he did not say is that any employee who took advantage of the “generous offer” was effectively providing a bailout lifeline to the chairman. This probably should have been explained to the workers who participated in the offer simply because they saw their co-workers jump right in. “A lot of colleagues I know have bought shares. I have too,” said one worker, who gave only his family name, Li. “The company is quite good and the chairman has guaranteed principal, so, of course, we’re interested. I know some colleagues even bought shares with borrowed money.”
The Rest…HERE
