A rising number of divorces among China’s wealthy tycoons is stoking investor concerns about the market impact of big stake sales and spurring a crackdown by the nation’s securities regulator.
At least eight major holders of the country’s listed companies split shares worth $3.9 billion so far this year after ending their marriages, according to data compiled by Bloomberg.
While the specific reasons for the divorces are unclear, repeated warnings from the China Securities Regulatory Commission hint at concerns that tycoons are using divorces to bypass rules on selling stock that have helped to prop up the market as the economy sags.
Company executives and shareholders with a stake above 5% can only sell as much as 2% of the float within a 90-day period in the open market. After divorcing, ex-partners until recently were able to sell at least double that amount.
Last month, the CSRC pledged to close that loophole, citing market concerns. A week later, both the Shanghai Stock Exchange and Shenzhen Stock Exchange tightened restrictions on stake reductions — spelling out that the same limits would apply despite a breakup. That followed a CSRC warning in July that majority shareholders of listed companies shouldn’t use divorce as a reason to bypass existing rules.
While the regulator didn’t specify which people it is targeting, Bloomberg tallied stock transfers disclosed by listed company shareholders in regulatory filings which cited divorce as a reason. Half of the eight ex-couples announced share sale plans just weeks or months after the breakup, filings show.
“There is clearly a stronger high-level request to support the stock market, and closing the loophole with divorces is one of the many measures we see recently,” said Gary Ng, senior economist at Natixis SA in Hong Kong. “If large shareholders continue to use divorce as an excuse to offload stocks, it shows the lack of long-term commitment to the firm.”
Investors are looking for any signs of weakness as a slower than expected economic recovery puts China’s benchmark stock index on track for losses for a third year running. And while there have been notable divorces in previous years, these were seen as sporadic cases that didn’t grab the attention of shareholders.
Representatives of all eight companies didn’t respond to requests for comments.
Families Overseas
Three of the eight mega-divorces this year include at least one partner with overseas citizenship or residency, regulatory filings show. Hu Huan, a Singapore permanent resident, received a stake worth $1.3 billion in April after divorce negotiations with her former husband Zhou Hongyi, the founder of 360 Security Technology Inc. and one of China’s wealthiest tech moguls.
Many rich Chinese families move the wife and children abroad to the US, Singapore or other countries where kids can receive a top-class education while the husband maintains his residence permit in China for business reasons, said Alfred Ip, partner of Hong Kong-based independent law firm Hugill & Ip.
“It is understandable that such distance and separation often lead to a dramatic change of habits which make it easy for families to fall apart when they are not together,” he said.
China will see the biggest outflow of millionaires globally this year as the nation’s wealth growth slows, Henley & Partners estimates. Many wealthy Chinese have made backup plans to emigrate in recent years after the country’s crackdowns and Xi Jinping’s push for “common prosperity” spooked the rich.
Uncovering Assets
Legal experts expect more eye-catching divorces in the near future as a law effective Jan. 1 — intended to protect women — will force both sides to disclose their assets in divorce proceedings. That could help uncover more assets — namely salaries, investments, inheritances and real estate — that tycoons would prefer to keep quiet.
Among the sizeable breakups this year, at least three were settled through courts, including a $192 million stake transfer by Suzhou Secote Precision Electronic Co. Chairman Sun Feng to his ex-wife in January after a court ruling.
Most of China’s wealthy have not yet adopted prenuptial agreements, as many marriages were sealed before couples got rich. China’s wealth boom began when it started to embrace the market economy in the late 1970s.
The new rule on disclosure could push Chinese executives to take more precautions like signing prenups before marriage, said Jeremy Morley, a lawyer specializing in international family law. Some local courts in China have already begun adopting asset disclosure this year, he said.
“That’s going to have a gigantic impact on the division of wealth upon divorce,” Morley said.
The article written by Venus Feng and Diana Li was originally published on Bloomberg – Wealth
