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Print Edition> Business
UPDATED: April 8, 2014 NO. 15 APRIL 10, 2014
Preferable Outcomes
Preferred stocks will bring positive results to the Chinese economy and the capital market
By Lan Xinzhen

The capital chains of some domestic enterprises have been broken. In March, a real estate developer called Xingrun in Zhejiang Province, home to a large number of private enterprises, went bankrupt after they were unable to repay the $400 million bank loans. A photovoltaic panel manufacturer Chaori Solar Energy Science and Technology Co. Ltd. in Shanghai also reported China's first corporate bond default in early March.

"Against this backdrop, the sooner the supervising authority launches the pilot program for preferred stocks, the earlier enterprises and the market can be stimulated," Wang continued.

The CSRC also says issuing preferred stocks will help enterprises obtain capitals more conveniently, thus reducing the capital pressure on enterprises in their business operations.

Positive effect

The market has warmly welcomed the rules on preferred stocks. On the day the rules were announced, stock prices of listed banks posted huge gains. The market estimates that listed banks may be the first to issue preferred stocks because many of the listed banks are among Shanghai Stock Exchange's 50 index members. For fast expansion of credit and because of stricter capital requirements imposed by the supervising authority, these banks urgently need more capital.

The performance of blue chips is also the subject of great anticipation in the market. Li Daxiao, head of the research institute of Yingda Securities Co. Ltd., said in his Weibo, a Twitter-like micro-blog, that the program of preferred stocks will be conducive to resuming the financing function of blue-chip shares and increasing their vigor.

Almost all securities companies had a positive view on the CSRC's new rules. A report from China Merchants Securities Co. Ltd. said the pilot program of preferred stocks will help deepen the joint stock reform of Chinese companies, boost development of the capital market and significantly influence the stock-issuing companies, investors and the capital market.

According to the report, to stock-issuing companies, preferred stocks will provide a more flexible tool of direct financing. Leaving the control rights of capital structure unchanged, issuing preferred stocks can raise the proportion of direct financing, supplement capital, reduce the overall debt ratio and optimize corporate financial structures. In the meantime, preferred stocks can serve as a payment method for mergers and acquisitions, hence broadening the source of capital and facilitating mergers and acquisitions, in addition to accelerating industrial reorganization.

For investors, preferred stocks will provide a new investment channel, especially in long-term investment funds such as social security and insurance funds. With fixed dividend rates, preferred stocks can provide stable investment returns. Since preferred stocks take priority over common stocks in the payment of dividends and upon liquidation, investing in preferred stocks can reduce investment risks, encouraging investors' willingness to directly invest in companies.

To the capital market, preferred stocks are conducive to enriching the varieties of securities and boosting stable development of the market overall. Preferred stocks have a combination of features including some of the properties of both an equity and a debt instrument, therefore they can fill in the gap in a varieties of securities in China, which will guarantee the interests of holders of common stocks, improve the corporate governance structure and boost steady and sound development of the capital market.

A report from Guodu Securities Co. Ltd. says the pilot program of preferred stocks will also help investors make better use of the capital stock. One of the major decisions made by the Chinese Government in its financial reform is to better employ capital stock.

Email us at: lanxinzhen@bjreview.com

About Preferred Stocks

Preferred stock is a class of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not carry voting rights.

In developed economies, the system of preferred stocks has already matured. By the end of 2013, preferred stocks in the United States had totaled $390 billion, of which 85 percent were issued by financial companies. Particularly since the global financial crisis broke out in 2008, they have remained a popular method of raising capital. The U.S. Government once spent $125 billion buying preferred stocks of nine major banks such as Citibank and JPMorgan Chase. This has raised the capital adequacy ratio of these financial institutions and alleviated the financing pressure on them, thus preventing the financial crisis from escalating.

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