China tries out preferred shares

China on Friday unveiled rules for a trial program allowing companies to sell preferred shares, offering a fresh funding channel that could boost market vitality amid the ongoing financial reforms, analysts said.

The China Securities Regulatory Commission (CSRC) said in a statement posted on its website that three kinds of companies will be allowed to issue preferred stocks: firms included in the Shanghai Stock Exchange (SSE) 50 A-Share Index; companies using preferred shares as a way to fund mergers and acquisitions; and companies seeking equity to finance a common stock buyback.

China's stock markets surged after the launch of the program, with the Shanghai Composite Index jumping 2.72 percent and the Shenzhen Component Index rising by 3.48 percent by close of trading Friday.

Preferred shares are considered less risky than common ones and offer higher returns than bonds. Holders of such shares have priority over common shares in allotment of corporate earnings and in asset distribution during liquidation, but they have limited rights in terms of corporate decision-making.

Zhao Xijun, deputy director of the Finance and Securities Research Institute at Renmin University of China, told the Global Times on Friday that issuance of preferred shares will be highly beneficial to the stock market if the pilot program turns out to be a success and can be rolled out to include more firms.

"Preferred share issuance will give companies fresh opportunities to seek capital and offer investors a product that is less risky than common shares and free from market volatility," Zhao said. "It is a vital step in China's construction of a complete securities market with diversified investment products."

Since preferred shares do not carry voting rights, they are an ideal financing tool for companies to raise new equity without diluting major shareholders' control of the business, Zhao noted.

Companies have faced difficulties in raising capital via issuing common shares, because of China's lethargic stock markets, Li Daxiao, director of research with Shenzhen-based Yingda Securities Co, told the Global Times on Friday.

The SSE 50 A-Share Index surged by 4.06 percent on Friday. It includes 10 of China's largest banks, which are seeking to raise funds in order to meet the country's tougher capital requirements.

Shares in half of the banks rose by more than 4 percent on Friday, with Shanghai Pudong Development Bank Co leading the surge by jumping 10 percent.

Preferred shares have existed in developed countries for decades. China lags behind such markets because its legal environment has only just reached a level of sufficient maturity for it to be safe to test such financing tools, Zhao said.

"Now the time is ripe for testing the issuance of preferred shares," he noted.