China's Stock Market Gets Tough on Illegal Share Sales

"He who conquers others is strong; he who conquers himself is mighty." — Tao Te Ching

Meaning: Those who defeat others have strength, but those who defeat themselves are truly powerful. The greatest opponent of a truly strong person is themselves.

On August 27, 2023, the China Securities Regulatory Commission (CSRC) tightened rules on share reductions, barring controlling shareholders and actual controllers from selling shares via the secondary market if the listed company's stock trades below its IPO price or below book value, or if the company has not paid cash dividends in the past three years or cumulative dividends are less than 30% of average net profit over the past three years. This is seen as one of the most impactful policies for A-shares. Statistics show that 1,649 listed companies failed to meet dividend requirements, 969 traded below IPO price, and 405 had a price-to-book ratio below 1. After deduplication, nearly 2,500 companies are affected, making the restriction quite stringent. The new rules will force companies to reduce aggressive financing, improve efficiency, and boost profitability and dividend capacity.

However, the very next day (August 28), Dongfang Shifang became the first to "slap the CSRC in the face" by reducing 3.4 million shares — a blatant disregard for policy and rules, reflecting how little authority the CSRC commands in their eyes.

Another company, Wole Home Furnishings, saw its shareholder Yu Fanyi and others quietly reduce over 20 million shares over the past two months, nearly clearing their position, without disclosure.

Encouragingly, on the evening of September 15, the CSRC announced the investigation progress on Wole Home Furnishings and the penalty for Dongfang Shifang's actual controller. Details:

"Investigation found that in 2021, Yu Fanyi and his concert parties bought Wole Home Furnishings shares via secondary market, reaching 5% without fulfilling disclosure obligations, and were issued a warning letter. Before the illegal reduction, Yu and his concert parties held over 22.44 million shares, 7.11% of total shares. On September 5-6, 2023, they sold all shares without stopping when reduction reached 5%, with subsequent illegal transaction amount of RMB 107 million and illegal gains of RMB 16.53 million. The CSRC plans to confiscate the illegal gains and impose a fine of RMB 32.95 million."

Shortly after, around 10 PM, Dongfang Shifang announced:

"In the current market, even the strongest policy combo — stamp duty cut, stricter rules on illegal reductions, lower margin requirements — only gives retail investors a new joke, letting those who chase highs experience in one minute what others take a month to feel: being trapped from 3,200 to 3,000 points."

Later, property easing measures — "recognize housing but not loans" in first-tier cities, lower down payment ratios, and relaxed purchase restrictions — failed to reverse the stock market's downward trend.

People blamed the exchange rate. The central bank cut the foreign exchange reserve requirement ratio from 6% to 4%, vowing to "act when necessary to resolutely prevent exchange rate overshooting risk." The yuan appreciated over 600 basis points that day, from a low of 7.3679 to around 7.27. Yet northbound capital still flowed out without looking back.

People said the economy was too weak. August retail sales and industrial value-added data beat expectations.

Then people said economic expectations were poor. New loans surged, up 0.51% year-on-year and 3,585% month-on-month. The central bank cut the reserve requirement ratio by 0.25 percentage points, releasing over RMB 500 billion in medium- to long-term liquidity.

So what the market lacks most now is confidence. The stock market hasn't fallen enough for bottom-fishing capital to dare enter. The economic uptrend isn't clear. The yuan remains high. The China-US interest rate spread is wide. The Fed hasn't stopped hiking, let alone started cutting.

Announcing this penalty won't bring incremental capital or change the mindset of industrial capital wanting to cash out. But importantly, it deters violations, shows the CSRC's stance, and quietly builds confidence in A-shares. Confidence has been shattered by the persistent decline. Rebuilding it takes time. At the bottom, we need patience, waiting for the turnaround.

In this era, confidence is more valuable than gold.

Risk Disclaimer: The views in this article are for reference only and do not constitute investment advice. Past performance of funds does not guarantee future results. Market risk exists; invest with caution.