On March 5, shareholders of Ping An Insurance (Group) Co. of China Ltd. (Ping An) passed a refinancing plan of 120 billion yuan ($17 billion) at its first interim meeting of the year with an overwhelming 92 percent in favor.

A month before, Ping An's plan, which had not been submitted to the China Securities Regulatory Commission (CSRC), triggered the first stock market tumble of 2008.

Ping An's actions were the tip of the iceberg as far as refinancing plans of listed companies go. The CSRC's public figures show that 23 listed companies released refinancing plans totaling 204.3 billion yuan ($28.77 billion) after Ping An dropped its bombshell. Though each of these individual refinancing plans was comparatively smaller than Ping An's, their frequent announcements have pressured capital supply in the market and tested the patience of investors.

Statistics from TX Investment Consulting Co. Ltd. show that by February 29, 53 listed companies had had refinancing plans passed by their boards of directors. These financing methods include reissuing A shares and convertible bonds, or offering rights. However, none of the refinancing plans have been approved by the CSRC, demonstrating CSRC's strict attitude towards the refinancing wave.

"Before listed companies issue their refinancing proposals, they must take the market situation and their own needs into full consideration," said Shang Fulin, Chairman of the CSRC. "They must prudently factor in the scale and timing of their refinancing plans, and take the capability of investors into consideration."

Shang noted that Ping An's refinancing plan was still in the process of the company's internal procedures and that it had not yet applied for refinancing with the supervisory department. The CSRC has pledged to check Ping An's financing plan carefully according to the law after it is submitted. The CSRC also urges listed companies to improve information disclosure.

When mentioning the recent refinancing plans or motions of some listed companies, CSRC stated it would carry out approval procedure strictly. The actions by the CSRC are meant to send a positive signal to investors and show that they are not standing on the sidelines with folded arms.

Market nightmares

It was hard for people to imagine how refinancing plans could have such a powerful impact on the stock market. In 2007, investors defied frequent interest rate hikes of the central bank. But large-scale refinancing plans have infuriated investors and shaken the foundations of the bull market.

On January 21, when Ping An's refinancing plans were made known, its share price plummeted and lost 20 percent of its value in 10 trading days. Dragged down by Ping An's performance, the benchmark Shanghai Composite Index in the mainland stock market plunged to 4320.77 from 5188.79 points during those 10 days.

On February 20, a month after Ping An's disclosure, rumors circulated that Shanghai Pudong Development Bank (SPDB) intended to raise 40 billion yuan ($5.6 billion) through its refinancing. Angry investors pulled SPDB's share price down by 10 percent on the same day, hitting the lower limit-the first such occurrence of its kind in seven years for SPDB. The benchmark index dropped 2.09 percent that day.

SPDB admitted its plan on the next day, claiming that it was "researching the possibility of issuing shares to raise money to supplement the bank's core capital." On the same day, SPDB's share price fell by another 5.98 percent, dragging down the share prices of all listed banks.

On February 21, rumor-mongers claimed that Sinopec Corp. intended to raise 60 billion yuan ($8.45 billion), causing a 12-percent drop of Sinopec share price in three days. Sinopec later denied the rumors.

China Unicom Ltd. and China Life Insurance Co. Ltd. were also involved in refinancing rumors. Investors rushed to sell China Unicom's shares and its share price dropped 10 percent on the same day the rumor came out. But the company also denied the refinancing plan. China Life's spokesman Liu Yan'an reminded investors that they should not believe rumors blindly.

Just like that, "refinancing" became the plague sweeping across the Chinese capital market. Any company influenced by this plague experienced sharp price drops, creating turbulence throughout the entire stock market.

Cheng Weiqing, analyst with CITIC Securities, said that the current shortage of capital supply in the stock market was one of the reasons behind the stock market plunge. Estimates are that since January, some 38 listed companies had raised refinancing motions, and these might need 230 billion yuan ($32.4 billion). Red chips (mainland companies listed in Hong Kong) are also expected to issue shares in the mainland A-share market in the first half of this year. In March, over 600 billion yuan ($84.5 billion) worth of non-tradable shares will be made tradable. Although a number of new mutual funds have been approved, they are not large enough to boost investor confidence.

A blessing or curse?

At present, both the investors and the media are criticizing the large refinancing plans of listed companies. Shi Hanbing, commentator of Shanghai Securities News said these companies were "gambling with investors' life savings."

However, in the eyes of Xu Guangxun, Chief Representative of NASDAQ in China, as long as the investors agreed, the listed companies can acquire abundant capital from the stock market. Xu said, "In NASDAQ, the quantity of refinancing has already surpassed the overall initial public offering (IPO) of the listed companies."

Li Kang, researcher with Everbright Securities, claimed that the refinancing plans could result in totally different effects under a different market background. As a matter of fact, refinancing was once considered a recipe for reviving the gloomy stock market.

After the adoption of Administrative Measures for the Issuance of Securities by Listed Companies in May 2006, the re-issuance of shares has become a favorable refinancing method for listed companies. In 2006, there were a total of 63 refinancing cases in the A-share market, raising a total of 107.28 billion yuan ($15.11 billion). As of December 11 last year, there were 157 cases of re-issuing shares in the A-share market, collecting 272.3 billion yuan ($38.35 billion) in all. In addition, another 242 listed companies announced refinancing plans. These events have occurred during the most bullish market ever in Chinese stock market history.

"In a bullish market, it is easy for investors to accept all kinds of financing programs," Xu said. "However, the current stock market is faced with serious shortage of capital and has shown signs of turning bearish. The large-scale refinancing program puts heavy mental pressure on investors and scares them away. This in turn drags down the market indexes."

In the capital market, financing plans can only be successful if investors welcome them. As for investors, refinancing means putting more money into the market, and they want that done in a bull market. Moreover, the price of the new shares must be lower than the currently tradable shares if the companies want to attract investors.

In 2008, the crazy bull market no longer exists and market readjustment has become a mainstream. Under such circumstances, investors cannot see the benefit of such large-scale refinancing. Furthermore, the weak market and shortage of capital have reduced investor confidence.

Tang Shuangning, Chairman of China Everbright Bank and former Vice Chairman of the China Banking Regulatory Commission, pointed out that the stock market is not a "cashier," and refinancing must have its limits. "China has strict approval procedures for IPOs, but refinancing approval procedures are not so strict," Tang admitted. "In recent years, refinancing events were mistreated as big, good news. Actually, this was manipulated by institutional investors."

Tang believes refinancing must be beneficial to both listed companies and investors, as well as to the healthy development of the stock market. "Otherwise, some listed companies might deliberately issue new shares to acquire large sums of money," said Tang. In the end, Tang said that listed companies must ask not what the market can do for them, but what they can do for the market.