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Wei Cai, Use of preference shares in Chinese companies as a viable investment/financing tool, Capital Markets Law Journal, Volume 11, Issue 2, April 2016, Pages 317–335, https://doi.org/10.1093/cmlj/kmw006
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1. Introduction
Since late 2012 preference shares, combining the features of both equity and debt, have been strongly promoted by the Chinese government and they received a warm welcome from the market, especially from listed companies in the banking sector. Preference shares are not new to China, but their recent revival has been driven by uniquely Chinese political economic factors. Existing studies of preference shares overwhelmingly focus on the USA 1 and few, if any, have systematically addressed the newly revived preference shares in China. This article aims to fill this gap by analysing the strengths and dangers of the revived preference shares in China. It enriches existing studies by providing a unique Chinese case on preference shares and offers important guidance for offshore investors interested in the Chinese market.
This article is organized as follows. First, it provides a short history of preference shares in China and describes the reasons for their recent revival. Subsequently, in the context of insufficient cash dividends and weak minority shareholder protections in China, it uses both theoretical and empirical analysis to explore their potential dangers; namely, the misuse by controlling shareholders to expropriate profits from minority common shareholders. It also shows the tensions that exist between shareholders of listed companies and preference shareholders. Finally, an analysis is offered of the comprehensive regulatory protection of preference shareholders, showing that they are in an advantageous position.
