In recent months, a series of events surrounding the securities lending mechanism known as "transfer financing" has put this practice under scrutiny in the Chinese marketNotably, these events include the controversial short-selling of Jin Di Co., Ltdon its first day of trading, the misinterpretation of shareholding by strategic investors in Tongyi Zhong, and Hillhouse Capital's questionable reduction of its holdings under the guise of securities lendingIn light of these incidents, the Shanghai and Shenzhen stock exchanges have taken decisive action to address the issues that have surfaced, implementing a revised set of rules governing transfer financing operations.

The newly revised regulations stipulate that major shareholders of listed companies who hold more than 5% of the company's shares and whose holdings fall below this threshold due to securities lending will still be subject to the same restrictions as if they had not decreased their holdings

This means that such shareholders cannot engage in illegal reductions, short-term trading, or financing transactions involving the company's stocksBy instituting these rules, the exchanges have effectively closed loopholes that previously allowed entities like Hillhouse Capital to exploit the system.

Moreover, the updated rules also focus on enhancing transparency in information disclosureThe exchanges now require listed companies to disclose specific details regarding the participation of shareholders holding more than 5% of shares, the top ten shareholders, and the top ten unrestricted shareholders in financing and transfer financing activities within their regular reportsThis includes disclosing shareholder names, their shareholding numbers and proportions at the beginning and end of the reporting period, as well as the quantities and proportions of shares lent out through transfer financing.

Additionally, companies must verify any changes in the status of their top shareholders compared to previous reports, particularly regarding participation in transfer financing

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If such activities are confirmed, firms must disclose the number of shares involved and the respective proportions of the company's total equityThis comprehensive approach aims to provide a clearer picture of shareholder dynamics and their involvement in transfer financing activities.

Despite these improvements, the new rules also highlight some limitations in the current information disclosure frameworkThe focus on periodic reports—such as quarterly, semi-annual, and annual reports—may not adequately address the need for timely and forward-looking informationSince the dynamics of transfer financing can significantly impact investor decision-making, relying solely on periodic reports can render this information retrospective and less useful for real-time investment decisions.

One major drawback of using periodic reports for disclosure is the lack of timeliness and relevance

Information about major shareholder activities, such as reductions in holdings, is critical for investors, yet disclosing this information only in regular reports can lead to scenarios where investors receive news too late to act upon itThis delays in information could undermine investor confidence and complicate decision-making processes, as they may miss opportunities or fail to react to critical market shifts.

Furthermore, packing transfer financing disclosures within the broader scope of periodic reports risks the information getting lost amid a multitude of other dataInvestors typically focus on a company's performance, dividends, and other financial metrics when reviewing these reportsConsequently, crucial details about transfer financing may not receive the attention they deserve, diluting their effectiveness as a disclosure mechanism.

To enhance the quality and transparency of transfer financing information disclosure, it is essential to adopt more proactive measures

For instance, the rules governing the disclosure of major shareholder reductions could serve as a model for transfer financing disclosuresBy requiring shareholders—especially significant stakeholders like those holding more than 5% of shares, strategic investors, and executives—to provide advance notice of their intentions to lend shares via transfer financing, the market would benefit from improved transparencyA notification period of at least five trading days could allow investors to adjust their strategies based on the disclosed information, fostering a more equitable environment.

Such proactive disclosures would significantly enhance the effectiveness of the information shared with the publicIn contrast, allowing shareholders to discreetly lend stocks without prior notification can lead to market manipulation, where stock prices are unfairly pressuredThis practice not only jeopardizes the interests of retail investors but also undermines the integrity of the market as a whole.

In conclusion, the recent regulatory changes by the Shanghai and Shenzhen stock exchanges represent a critical step towards addressing the issues surrounding transfer financing