Use of Preference Shares in Chinese Companies as a Viable Investment/Financing Tool

Abstract

This article studies the revival of preference shares in China and its strengths and dangers as a viable investment/financing tool. Its main strength is to help Chinese banks meet new capital adequacy requirements and to stimulate the stagnant stock market, and its core danger is its potential misuse by dominant shareholders to expropriate profits from minority common shareholders in the context of weak minority shareholder protection and insufficient cash dividends in the Chinese stock market. Empirical evidence gives partial support to this understanding of its danger because the impact of preference shares on existing common shareholders is mixed and differs among different types of companies. This article also shows that the current regulatory regime in China provides comprehensive protection for preference shareholders, and that compared to minority common shareholders, preference shareholders are in an advantageous position. Although it has the potential danger of being misused by controlling shareholders to expropriate profits from minority common shareholders, it has been used effectively as a viable investment and financing tool in China.

Keywords: preference shares, common shares, dividend yields, expropriation, China