New prohibition against investments in ‘Unreal Industries’ in China

Written by Felix Yang || May 18 2016

Last week in China, the China Securities Regulatory Commission (CSRC) prohibited listed companies from raising capital earmarked for investment in the following four industries: Internet Finance, Video Games, Film and TV, and Virtual Reality. The new prohibition is an attempt to steer money into the real economy, which is defined as industries producing tangible products and services. Permissions for mergers, acquisitions, and refinancing in those ‘unreal industries’ have been halted, as well.

It should be noted that the CSRC is not banning all cross-industry investment, just those in these areas. For example, a concrete company would be allowed to sell shares and invest in solar power, but not in VR.
This new prohibition comes on the heels of several recent incidents in the market that have raised concern among the regulators:

  • Decoration material company Dilong bought a gaming company for 3.4 billion RMB
  • Concrete company Chaodong invested 1.68 billion RMB in internet finance
  • Technology developing and consulting company Jiecheng bought a film company for 525 million RMB
  • Gardening company Lingnan acquired a creative and VR company for over 800 million RMB

These deals involve companies raising capital for investment in new and risky industries where there has already been signs of valuation inflation. Partly due to a lack of commonly accepted valuation standards for companies in these industries, people are able to bid up prices through speculation. From a speculator’s point of view, the purpose of the investment is to make quick money, as long as they can sell the shares at a higher price to the next buyer. Once the price has soared, those speculators will cash out. When there are no buyers willing to pay more for these shares, the bubble will burst. But it will only harm the investors and the market in the end.