Share buybacks by companies part of efforts to lift sentiment, prop up prices

Share repurchases surged in mainland stock markets with a sizable growth in the number of such transactions on an annual basis, data from information provider Wind Info showed on Friday.

According to data released on Friday, share purchases by companies in the A-share market totaled 29.51 billion yuan ($4.27 billion) year to date, far above last year's total of 8.3 billion yuan.

A share repurchase is a program by which a company buys back its own shares from the marketplace, usually because management thinks the shares are undervalued, thereby reducing the number of shares in the market. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price.

Market sources said repurchases have risen as companies are keen to shore up flagging share prices.

"Repurchases are to reassure investors that the management remains confident on overall prospects and is willing to pay a higher price to own more stock," said Zhang Xia, chief strategy analyst at China Merchants Securities Co Ltd.

Zhang said another major reason for the surge in stock repurchases was listed companies' expectation of a more favorable policy environment, after the China Securities Regulatory Commission said on Sept 6 that it was considering revisions to the Corporate Law to encourage share repurchases.

A key feature of the new changes is the move to allow a company to hold repurchased shares for a maximum of three years and enabling their use in equity incentive plans, analysts said.

In a typical equity incentive plan, employees are awarded stock options in the company if they achieve a performance target over a time period of two or three years, while the current law requires companies to transfer the ownership of repurchased stocks within a year of the buyback.

Speeding up stock repurchases could boost the capital markets as it will help bring in more funds, Zhang said. "Its scale is set to become bigger in the future as more companies undertake repurchases," he said.

"Stock repurchases helped propel the bull market in the United States after the 2008 financial crisis," said Xun Yugen, an analyst from Haitong Securities Co Ltd.

Xun said the current value of stock repurchases in the A-share market is just 0.0049 percent of the total market capitalization during the first eight months of this year, much lower than the 0.7402 percent in the US markets. "There is ample room for further growth."

Analysts said stock repurchases in the A-share market could be further encouraged by quickly putting in place the revised Corporate Law along with other supportive measures such as tax reforms.