Article/Sina Financial Opinion Leader (WeChat official account kopleader) columnist Berry Research
When the new policy of share repurchases in China's company law was revised, the industry said in succession that the amendment would improve the soil of the domestic repurchase system. More analysts directly pointed out that China's A-shares would set off a wave of repurchases. Almost at the same time, the wave of stock repurchases that jumped across the ocean in the repurchases normal -- the U.S. market -- also gained momentum after the U.S. election on November 8.
What are the reasons for the share repurchases in China and the United States?
Thanks to the policy of "allowing in principle and prohibiting exceptions" for more than 20 years, the US repo market has been in full swing for a long time. This record breaking growth momentum is not accidental. In fact, since the beginning of this year, the stock repo of the US S&P 500 companies has started to grow by leaps and bounds, This leap, of course, is mainly due to Trump's tax reform in 2018, which will reduce the company's top tax rate from 35% to 21%. These tax reduction funds support listed companies to make greater efforts to buy back. According to the latest quarterly data released by S&P Global at the end of September, the amount of share repurchases of S&P 500 companies in the second quarter of 2018 reached a record high of $190.6 billion, up 58.7% over the same period of last year, again breaking the historical record of repurchases in the first quarter of this year.
Looking at the scale of repurchase of American shares in the past decade, its repurchase cyclicality mostly occurs in the case of an upward economic cycle. Generally speaking, when the economic cycle is upward, if the enterprise has sufficient funds, it will increase repurchase behavior. Generally speaking, the capital used by American companies for repurchase comes from the incremental cash flow brought by the continuous growth of corporate profits. Under the condition of stable capital expenditure, investment and financing cash flow, these funds may be used for stock repurchase. However, the profit growth brought about by the economic stimulus of tax reform is not permanent. This impact will gradually weaken after 19 years. At the same time, the excess return of repurchases of normalized U.S. stocks will gradually weaken compared with the overall market, and the marginal incentive effect of repurchases on stock prices will decrease. As of the deadline, JPMorgan Chase said that, from the current situation, unless the interest rate of debt repurchase starts to exceed the return of stocks, or stocks have been bought out, American stock companies will continue to repurchase. Then why is the company still willing to buy back and still not weaken its enthusiasm after the tide.
To sum up, large-scale repurchases are by no means only affected by the economic cycle. Some analysts claim that the repurchases of U.S. stocks are more pessimistic about future investments in the face of global economic weakness, and thus transfer a large amount of funds to the market. Under normal circumstances, the decision makers decide to buy back because the buy back will not affect the company's profits and earnings per share, but also boost the stock price. However, unlike the United States, China's stock repurchase is more of a phased short-term behavior, and it is not based on the growth of corporate profits. In contrast, the peak of all previous stock repurchases occurred when the growth rate of the economy and corporate profits declined. Although the amendment of China's company law opens the door to repurchase, the Shanghai Stock Exchange Index is at a low point in nearly two and a half years, more like the sword of Damocles (22% of listed companies promise to pledge at least 30% of their shares for short-term loans).
Historical changes and impacts of China US repurchase system
As shown in the figure, the US repo system is established following its consistent legal purpose, adopting the principle of "allow in principle, exception prohibition", and then revising the terms to control internal transaction risk and operational market risk. According to the above figure, it is not difficult to find that before the 1980s, repurchasing one's own shares in the public market was considered as an operating share price. However, the decree was reversed under President Reagan. Rule 10b-18, issued under a package of economic stimulus policies, stipulated that this enterprise could buy back shares in the open market, almost without regulatory restrictions, and immediately removed the previous obstacles. At the same time, it is also added that if the repurchase meets the conditions of transaction mode, time, quantity and price established by the rules, the risk of its violation, especially the risk of being regarded as market manipulation, will be greatly reduced. This policy aims to provide enough freedom for the company to buy back shares, while ensuring that the fairness of the market is not violated. The original text of the law is as follows:
“Under the rule， a corporation’s board of directors can authorize senior executives to repurchase up to a certain dollar amount of stock． After that， management can buy more company’s shares provided that， among other things， the amount did not exceed a “safe harbor” of 25% of the previous four weeks’ average daily trading volume．”
In order to further strengthen risk control, the Repo Amendment Rule 10b-5 of the US Securities Regulatory Commission (SEC) was issued 18 years later, which stipulates that the repo with pre disclosure and automatic transaction that cannot be changed will not be identified as insider trading, which further reduces the risk of insider trading caused by stock repurchase. The official disclosure documents of the SEC are as follows:,
“Rule 10b-5 under the Exchange Act， solely by reason of the manner， timing， price， or volume of its repurchases， if the issuer repurchases its common stock in the market in accordance with the safe harbor conditions．” The amendments are intended to simplify and update the safe harbor provisions in light of market developments since the Rule‘s adoption． To enhance the transparency of issuer repurchases， we also are adopting amendments to a number of regulations and forms to require disclosure of all issuer repurchases （open market and private transactions）， regardless of whether the repurchases are effected in accordance with the safe harbor rule．”
Back to this article, on the whole, in the United States, where repo is very popular, stock market repo has become an important force supporting the strength of American stocks. However, according to different national conditions, China adopts the prudent policy of "principle prohibition and exception permission". Until 2005, the CSRC promulgated the Administrative Measures for Repurchase of Listed Companies, which stipulated that the repurchase method included not only tender offer, but also centralized bidding in the stock exchange. Since then, the stock repurchase has gradually been in line with international standards; However, compared with the United States and other markets, the repurchase intensity is significantly smaller. Then, in 2008, China ushered in the cancellation of the administrative review of repurchase behavior - so far, the stock market has entered the era of full circulation, learning from foreign experience, and implementing market-oriented operations. Now, after 13 years of historical transformation, the New Deal in October this year is due to the continuous decline of the market due to various factors. The valuation of listed companies continues to decline. A large number of listed companies have initially established the A-share treasury stock system under the condition of the continuous decline of share prices. On the whole, it is to ease the pledge crisis of some companies and facilitate the market value management of listed companies.
Is the treasury stock system under stable stock price once and for all?
Although the origins and legal purposes of repurchases in China and the United States are different, the United States is more likely to replace cash dividends (for most investors, the income tax rate is higher than the capital gains tax) and prevent mergers and acquisitions, while China is more likely to optimize the equity structure and stabilize stock prices, but it is in full swing in the United States but not popular in China, How to guide companies to buy back shares as an important means of financing and avoid operating the market is the direction of China's buy back policy.
Previously, the purpose of repurchasing shares by enterprises was mostly to implement equity incentive plans, and the cancellation time was short. The new company law revised in October actively introduced the treasury stock system, and this amendment will not allow the cancellation of the restrictions on holding repurchased shares in treasury. Now the introduction of treasury stock system has made listed companies more confident in repurchasing shares, especially when it can better match the long-term shareholding demand of employee stock ownership plan or equity incentive. However, some analysts pointed out that this provision still has risks. Since the main body of listed companies belongs to the information superiority side, and small and medium-sized investors belong to the information inferiority side, that is, if treasury shares are allowed to exist for a long time, the company has the possibility to use treasury shares to randomly allocate company funds and manipulate stock prices, so it is still necessary to improve information disclosure as much as possible. At the same time, in the United States, the positive economic impact of share repurchases benefits from the improvement of its system, So as to reduce the adverse impact of information asymmetry on minority shareholders.
Although the backgrounds of China and the United States are different, China is different from the United States, which adopts the principle of prohibition and exception. But both China and the United States, for the secondary market, once the signal of stock repurchase is released, the capital market will interpret this signal as good news that the stock price is undervalued. In addition to the news level, China's current amendment to the Company Law, that is, broadening the source of repurchase funds, aims directly to promote the stock price rise through the capital level within a certain period of time, so it is expected to play a better role in stabilizing the stock price. According to the theory of modern corporate capital structure, for listed companies with low asset liability ratio and reliable guarantee of cash flow, the repurchase of tradable shares by increasing debt financing means that the company's equity decreases and earnings per share increases, which will effectively improve the return on shareholders' earnings. Therefore, we can focus on industries with high proportion of cash in total assets, such as household appliances Defense and military industry; At the enterprise level, attention can be paid to high-quality enterprises with large stock price decline, valuation, especially low P/B ratio, good cash flow, and abundant cash in hand, especially those whose stock prices have fallen sharply due to the high equity pledge ratio of major shareholders before, but are well managed and financially sound.
(The author of this article introduces that an investment research institution with a history of 20 years provides the most cutting-edge analysis report for US equity investors.)
