2018.12.17 Jiang You Views:
Recently, to relive share pledge crisis for listed companies, lots of “bailout funds” have come up in the market, drawing much attention and discussion.
Zhang Wei at the Forum of Macroeconomy and Bailout Approaches
Recently, to relive share pledge crisis for listed companies, lots of “bailout funds” have come up in the market, drawing much attention and discussion.
On December 14th, on the forum of “Macroeconomy and Bailout Approaches” sponsored by CoStone Capital, Zhang Wei delivered a speech titled “Bailout Funds — Resource Allocation Under Special Context of Capital Market” and shared his views on bailout funds after going through some basic facts of share pledge in A-share market, bailout funds and M&A of stated-owned enterprises (SOE).
Zhang Wei said that almost each share has been pledged by companies in A-share market, among which 80% are private-sector firms. Many of them are under-capitalized and overleveraged. That is why it’s important to tell which companies are worth a bailout. Otherwise, it may encourage a moral hazard if stakeholders start counting on a bailout when things go wrong.
In Zhang Wei’s opinion, bailouts should reach out to promising firms which are really in need but have strong fundamentals, rather than those rusty ones that face dead ends. Underperforming companies might as well go bust. Meanwhile, it’s even more unsettling if shareholders take bailout as an opportunity to sell their shares.
Zhang Wei has also analyzed current macro-economic situation. He said that there are two irreversible trends due to economic changes. One is about China-US relationship, the other concerns the economic downward trend.
The extracts of Zhang Wei’s speech are as follows:
There are two major irreversible changes this year. Bilateral ties between China and the US are hard to recover in spite of any improvement or deterioration on the surface. It’s not only because of great power competition, but the differences on ideology and political system make the US believe that the way China competes undermines their interests. And the conflict is just getting started.
The second irreversible change is the economic downward trend. After 40-year high-speed growth, China now encounters an economic downturn, which can hardly bounce back in the long run. Private-sector firms, the vital engine for economic growth, now are cash-strapped. All sorts of pressures lead to a sharp correction in the capital market. In the past, share pledges and M&A deals soar as founders seek new borrowing tools. Source of easy money raises risks of an amplified market downturn. Chinese stockholders are ramping up borrowing against shares, driving revenue for securities but creating risk of a chain reaction in the event of a sharp market downturn.
Between 2000 and 2016, when China’s average economic growth reached approximately 10%, stocks fell into a continuous bear market. Stock market has something to do with herd mentality, which also results in share-pledge crisis.
Share-pledge crisis in A-share market
A-share listed firms pledge as many shares as possible. Share-pledge crisis is especially prominent for private-sector firms. According to China Securities Depository and Clearing Company Limited (CSDCC), shareholders in 3485 firms, taking up about 98% Shanghai and Shenzhen-listed firms, had pledged shares worth ¥4.3T by the end of 2018. The market cap of pledged shares accounted for 10% of total shares.
There are too many share pledges, and 2019 will usher in a greater maturity peak of stock pledges. I have recently communicated with many listed companies. Many listed companies deliberately create a shell company on the first day of listing and sold it to cash out. Today, a generally healthy shell company is worth of ¥4B which is just a median, and this is a distorted valuation system.
Think twice before a bailout
Share-pledge crisis pops up due to changes in the market. Statistically, local government has sponsored funds worth of ¥180B, brokers ¥220B, insurance and asset management firms ¥100B. Still, there are different opinions on when to reach out and how to employ.
Shenzhen authorities are quite positive about bailouts. I assume that any bailout decisions that are against the market rules will provoke controversy. As long as you control the shares of a firm, you have to face corporate governance and fulfill the board of directors’ role, concerning corporate strategy, appointments and removals of executives and their salary, financial supervision. It’s impossible for you to stand by and do nothing.
The receivers of bailouts are mostly private firms which do not have strong fundamentals. Therefore, it is risky to take over those under-capitalized and overleveraged firms. An unfair bailout may even cause corporate irresponsibility and “adverse selection”.
Anyone who gets involved in a bailout should keep vigilant and stay away from such risky programs or firms as overvalued firms and those who sell their shares amid a bailout.
A bailout should reach out to those in need
There is much experience about bailout for the Chinese mainland to gain from the US, Japan as well as Taiwan and Hong Kong. In America’s case, it invested $400B in financial institutions to resolve crisis apart from quantitative easing (QE) program. It had some negative impacts and had sharpened the income divide, for which Wallstreet has always been criticized.
We insist on bailing out those promising firms in need. Those terrible firms should be left out to go bankrupt in a sluggish economy so as to carve out some room for companies that are doing well.
The pharmaceutical industry, for example, may only have 1% of 3000 firms that are actually working on R&D. Most of them are more committed to finding alternative channels to do grey marketing. Only after these low-grade companies are forced out can the industry and the market secure a healthy development.
Meanwhile, we use several indicators such as P/E ratio, ROE and the growth rate of net profit in the past three years to screen companies which need bailouts. There are 373 qualified ones that are worth investments.
However, there are other things that can also sustain a company through an economic cycle. Huawei poured ¥89.7B in R&D, accounting for 27% of its revenue. Although it entered telecommunication industry because of “ignorance”, it makes painstaking efforts with purpose and keeps its course, making it through the whole industrial and economic cycle. We prefer to look at a company from historical perspective and take a strength-based approach to find target companies for bailouts.
Source: China Fund
Rewritten by Lu Ying; Edited by Jiang You
Over the past year, the bull market returned, with technology leading the way.
As I said back in October 2024, the rally that began on September 24 was not merely a rebound, but a reversal. Since then, China's capital markets have undergone a broad revaluation, moving from undervaluation toward fair value.
The Shanghai Composite Index reached its highest level in a decade. The "Yi-Zhong-Tian" trio—Eoptolink, Zhongji Innolight and TFC Communication, three prominent Chinese optical communications stocks—saw their share prices multiply severalfold in a single year. Cambricon's market capitalization briefly exceeded RMB 600 billion. Elsewhere in the technology sector, triple-digit price-to-earnings ratios and valuations exceeding RMB 10 billion became commonplace.
Some investors were greedy; others, fearful. Still others asked me: Are technology stocks in a valuation bubble?
My answer is that what we are witnessing is the hunger and anxiety of an era, reflected in the capital markets. Once you understand this, the current fervor for technology investing is no longer difficult to explain.
Investment has nothing to do with macroeconomics, but everything to do with geopolitics.
China-US relations will shape the investment landscape for decades to come. Geopolitics has played a major role in shaping the hunger and anxiety of our times, fundamentally reshaping the way we invest.
What, then, lies at the heart of China's hunger and anxiety?
The Fourth Industrial Revolution is already underway, yet China has not fully overcome the technological shortcomings left by the Third. There is no time to lose.
This is why some people wonder: Why do Chinese computing chip companies command such high valuations when their technologies still lag so far behind NVIDIA's? Why does NVIDIA trade at just 50 times earnings, while a company hailed as "China's answer to NVIDIA" commands a multiple of 300?
To me, this gets the logic exactly backward.
It is precisely because these companies cannot catch up with NVIDIA in the near term that they command a higher strategic premium. The wider the technological gap, the greater the strategic value.
The further something lies beyond our reach, the stronger our hunger. The harder it is to catch up, the deeper our anxiety. If China were to achieve a complete breakthrough in computing chips one day, valuations might actually come down.
Where can one find China's most spectacular natural landscapes?
Much of the answer, I believe, lies in and around the Hengduan Mountains: the Meili Snow Mountains, Jade Dragon Snow Mountain, Mount Gongga, Mount Siguniang, Jiuzhaigou, and many others. Vast differences in elevation and deep fault lines have given rise to landscapes of extraordinary grandeur.
Hard-tech investing follows a similar logic.
Technological gaps, discontinuities in capabilities, and missing links in industrial systems: a leap in difficulty brings a leap in valuation, and a successful breakthrough can, in turn, bring a leap in returns.
This logic extends well beyond computing chips. It is equally evident in memory semiconductors, commercial spaceflight, and other sectors where China still faces substantial technological gaps with other countries.
It was precisely this conviction that led CoStone Capital, starting in 2016, to decisively focus its investments on three areas: hard tech, emerging industries, and life sciences and healthcare. In this context, "hard tech" refers specifically to important industries in which China faces a technological gap with the United States.
Thanks to this forward-looking strategy, CoStone Capital established an early presence across the full value chains of key sectors, including semiconductors, artificial intelligence, and robotics.
Looking ahead, the frontiers of technological progress and industrial upgrading are boundless. Nor can the gaps in hard technology be closed overnight. The twin windows of opportunity presented by technological innovation and the development of homegrown alternatives to foreign technologies have only just begun to open.
The road ahead is long, but the future holds immense promise.
As an investment firm, CoStone Capital will continue to invest where the hunger and anxiety of each era run deepest, move forward with the tensions that shape our times, and extend our reach toward the most challenging—and most important—frontiers.
Spring 2026