China’s listed non-financial firms have been forbidden from raising capital for side ventures in four specific technology fields, on the grounds that those projects are not part of the ‘real economy’.
According to reports from regional journal Caixin and London’s Financial Times, sources claim that new subsidiaries in the internet finance, video game, film and TV, and virtual-reality segments have been earmarked as ineligible for funds raised through stock sales.
Officials at the China Securities Regulatory Commission (CSRC) have imposed the ban, which the sources say distinguishes those four fields from other sectors because they are largely ‘intangible’ in nature, making insufficient contributions to material products and service lines.
One source told Caixin that CSRC officials have become concerned over the motives behind tech-related subsidiaries – particularly if the companies launching them already have patchy trading records.
In the CSRC’s view, he said, “If a company that does not do its main business right branches out into an unrelated field, it is often just to create hype.” Too many ventures of that type, he added, would “inflate bubbles” within the corporate landscape and “ultimately hurt investor interests”.
A regional investment banker quoted by Caixin confirmed that valuations in the four segments “have shown signs of big bubbles” recently, amid a lack of agreed valuation standards for businesses in those fields.
The ban means that China’s biggest corporates will find it more difficult to diversify into technologies that are helping to define the future shape of other economies.
The measure arrives in the wake of jitters over the spread of illegal financing, with 14 of China’s most powerful ministries and regulatory agencies convening late last month to organise a crackdown.
Delegates at the 27 April meeting announced that in 2015, instances of illegal financing – often involving technology-based firms – rose by 71% year-on-year, with the amount of money involved growing by 57%.
Meanwhile, the number of people embroiled in illegal financing cases leapt by a staggering 120%, amid a 44% rise in the number of cases involving ¥100m or more.
A tougher approach to stamping out suspect advertising and tighter scrutiny of asset management firms, rural cooperatives and peer-to-peer (P2P) lenders are among the measures that will be taken in the crackdown.
Shi Pengfeng, head of P2P lending tracker wdzj.com, told the South China Morning Post: “The recent bout of illegal fundraising cases has triggered concerns about social stability and badly hit the e-finance sector.”
He added that his firm regards the crackdown as a necessary step, as operators in the illegal fundraising market have “defrauded the public and cast a shadow on legal players”.