The Case Study of Cross-Shareholding between ZHENYE and CHANGCHENG

The phenomenon of cross-shareholding in China was formed in the 1990s. Domestic and foreign scholars have studied the motives and effects of the formation of cross-shareholding system, but there are few specific case studies, especially the cross-shareholding formed by the government. Therefore, this paper will study the cross-shareholding case. Shenzhen Zhenye (Group) Co., Ltd. (“ZHENYE” for short) and Shenzhen Changcheng Investment Holding Co., Ltd. (“CHANGCHENG” for short) held each other’s shares from 1995 to 2013, which lasted 18 years. This cross-shareholdings relationship promoted by the government brought both positive and negative effects to ZHENYE. This article analyzes the effects to ZHENYE and give suggestions to the cross-shareholdings companies: 1) in order to prevent hostile takeover, the cross-shareholdings companies should consider the percentage of cross-shareholdings or cooperate with more than one company; 2) making an alliance with other companies will benefit the long-term development of the company; 3) cross-shareholdings can be a new way of transformation of the state-owned enterprises.


J. L. Liu
The cross-shareholding system was originated in Japan after World War II.
Under the threat of highly dispersed shares and foreign acquisitions, the cross-shareholding system became an effective means of resisting hostile takeovers of foreign capital. From 1975 to 1989, the cross-shareholding of Japanese companies reached its peak. However, during the subsequent economic recession in Japan, it played a role in fueling the stock market bubble.
China's cross-shareholding phenomenon appeared late and was formed in the 1990s. China's earliest cross-shareholding originated from the government's guidance. After 2005, with the promotion of the share-trading reform, more and more non-tradable shares were converted into tradable shares, and crossshareholding behavior became active. Cross-shareholding can form corporate alliances [1], stable stock price [2], and promote enterprise development, but also there are problems such as increasing capital [3] and harming the interests of minority shareholders. Cross-shareholding has an increasing influence on China's capital market. Scholars' research on cross-shareholding is also deepening, and researches on the motives and effects of cross-shareholding, but domestic research mainly focuses on theoretical research. However, the research on case studies, especially the number of cross-shareholding research initiated by the government, is small, so this paper will study the cross-shareholding cases of Shenzhen Zhenye (Group) Co., Ltd. ("ZHENYE" for short) and Shenzhen Changcheng Investment Holding Co., Ltd. ("CHANGCHENG" for short). This paper has both theoretical and practical significance. In theory, our research will enrich the literature on cross-shareholding research. In practice, our research can provide advices for cross-shareholding companies.
In the second part of this paper, we will briefly introduce the current status of cross-shareholding in China. In the third part, we will analyze in detail the process, positive influences and negative influences of ZHENYE and CHANGCHENG cross-shareholding. In the fourth part, we will make some suggestions to the cross-shareholding companies based on the case of ZHENYE and CHANGCHENG cross-shareholding. Finally, we will summarize the article.  developed economy provide convenience for the cross-shareholding of enterprises. Figure 2 shows the industry distribution of cross-shareholdings of listed companies in 2017. The largest number of listed companies participating in cross-shareholdings is manufacturing, accounting for 42.73%, followed by the wholesale and retail and real estate industries. This is related to the relatively mature development of China's manufacturing market. It is among the first to obtain the first-class qualifications for national real estate development.  The data comes from Analysis of Cross-shareholding of Listed Companies-Taking Suning and BABA as Examples [4]. CHANGCHENG, as one of the founders of ZHENYE, held its shares at the beginning of ZHENYE's listing. ZHENYE's 1992 annual report showed that CHANCHENG held 3.98% of its shares.

The Motivation of Cross-Shareholding
In the early 1990s, in order to deepen the reform of state-owned enterprises and realize the diversification of equity, the government guided enterprises to cross-share. Liaoning Cheng Da Co., Ltd. and GF Securities Co., Ltd. were typical cases of cross-shareholding in that period [1]. ZHENYE and CHANGCHENG were also the intersections formed during that period.
ZHENYE and CHANGCHENG began to cross-share in 1995, when both were local state-owned enterprises controlled by Shenzhen Construction Investment Holding Co., Ltd., and ZHENYE accepted the transfer of CHANGCHENG shares by Shenzhen Construction Investment Holding Co., Ltd. as a transferee to form a cross shareholding relationship. It can be seen that the cross-shareholding between ZHENYE and CHANGCHENG was promoted by the government. Therefore, it is speculated that Shenzhen Construction Investment Holding Co., Ltd. is to separate control and cash flow rights. Simultaneously, it would control the two companies and carry out capital expansion with less capital [5].

Cash Dividend Distribution Policy Brings Cash Inflows to
Cross-Shareholding Companies ZHENYE recognizes the shares of CHANGCHENG as available-for-sale financial assets. During the period of holding the shares, the change in the fair value of the

Circulate Necessary Funds
The development of real estate enterprises will be affected by the government's

J. L. Liu
Under the control of macroeconomic policies, the overall development of the industry has slowed down, and the income from holding equity in the same industry can be limited. The transfer of shares in the same industry can enhance the company's financial strength to a certain extent in a relatively short period of time. In this high-pressure situation, the allocation of limited cash inflows to more efficient projects can effectively improve the overall asset utilization of the company. In addition to the transfer of the sale of shares, the pledge of the shares held by the shares can also bring in cash inflows [6]. In 2009, ZHENYE pledged the shares of CHANGCHENG to obtain a loan guarantee of 700 million Yuan, which provided strong support for its real estate development business. Cross-shareholding is conducive to stabilizing stock prices, while high stock prices can bring more pledge loans to enterprises and bring more funds to enterprises. This behavior is more common in the parent-subsidiary cross-shareholding model.

Limited Role in Preventing Acquisitions
The cross-shareholding system originated in Japan and played an important role in preventing Japanese companies from being maliciously acquired by foreign capital. It has the positive effect of preventing enterprises from being merged. shares, which eventually led Baoeng to withdraw from the control of the controlling share.
Cross-shareholding can indeed play a role in preventing companies from being merged. Cross-shareholding companies can form a coalition relationship.
When the company is exposed to external acquisition risks, a stable alliance relationship can stabilize the stock price, and the company as an alliance refuses to sell the stock to the acquirer, thereby making the purchaser purchase cost increase and abandon the acquisition. When ZHENYE was subject to the risk of being acquired, the increase in holding behavior of Shenzhen SASAC and Zhiyuan played a key role in preventing the acquisition. Although ZHENYE and CHANGCHENG had cross-shareholdings but had a small shareholding ratio, CHANGCHENG only held ZHENYE 3.31% of the shares, when the capital-sufficient placards hold up to 15% of the shares, such a small proportion of cross-shareholding alliances had little effect on preventing acquisitions. In addition, CHANGCHENG was also exposed to the risk of being acquired during the cross-shareholding period, which also shows that a small proportion of cross-shareholdings have a limited role in preventing acquisitions.

Cross-Shareholding Brings the Problem of Horizontal Competition
Horizontal competition means that "the business of a listed company is the same or similar to the business of the controlling shareholder, the actual controller Both ZHENYE and CHANGCHENG are real estate companies. The business of CHANGCHENG also involves hotel operations. In comparison, ZHENYE's business is more concentrated. As the controlling shareholder of ZHENYE and CHANGCHENG, the Shenzhen SASAC has limited resources. When it is necessary to allocate resources between the two real estate companies, there must be some concerns, just as the two companies are simultaneously subject to the risk of being acquired. The Shenzhen SASAC should choose between the two. In the end, the Shenzhen SASAC transferred most of the shares of CHANGCHENG to private capital, thus solving the long-standing horizontal competition between ZHENYE and CHANGCHENG.

Cross-Shareholding Brings Inflated Capital Problems
In the cross-shareholding relationship, the same funds were circulated between ZHENYE and CHANGCHENG. This capital also increased the double calculation of the capital generated by the two companies, which would inflate the corporate capital. In addition, ZHENYE recognized the shares of CHANGCHENG held as available-for-sale financial assets, and increased the owner's equity of ZHENYE when the stock price of CHANGCHENG rose. When creditors evaluate the strength of a company, it may be misled by the inflated capital, which may damage the interests of the creditor.
J. L. Liu

Increase Cross-Shareholding Ratio or Alliance with Multiple Companies to Prevent Hostile Takeovers
The cross-shareholding system enables companies to form alliances, expand their scale, strengthen their capital, and prevent hostile takeovers. However, from ZHENYE and CHANGCHENG, it can be seen that a small proportion of cross-shareholdings has a limited role in preventing acquisitions.
Cross-shareholding can indeed play a role in preventing companies from being merged. This effect is mainly reflected in two aspects: First, cross-shareholding companies can form a coalition relationship. When the company is exposed to external hostile takeover risks, a stable alliance relationship can stabilize the stock price and make the acquirer's expected acquisition cost too high to abandon the acquisition. Second, as a party in the alliance relationship, it does not sell the shares it holds to the acquirer, forming a "white knight", making it difficult for the acquirer to acquire, thus making it prohibitive.
The ratio of ZHENYE and CHANGCHENG cross-shareholding was only 7.05% and 3.31%. When the capital-rich purchaser increased the company's shares through the secondary market to reach 15%, the above two aspects had little effect on them. Therefore, if you want to use cross-shareholding as a means to prevent the purpose of acquisition, then you must consider how much the shareholding ratio can play a better role. In addition, companies can form alliances with multiple companies at the same time to form a complex cross-shareholding relationship. When faced with acquisition risks, a complex corporate alliance network can play a greater role than a small proportion of direct cross-shareholdings such as ZHENYE and CHANGCHENG.
In addition, cross-shareholdings must also take into account potential risks.
For example, when the stock market declines, cross-shareholding will form a drag-down effect. At this time, cross-shareholding companies are more likely to become targets of acquisition.

A Strategic Cross-Shareholding Relationship Should Be Established between Enterprises for Long-Term Cooperation
Although ZHENYE and CHANGCHENG have a cross-shareholding time of 18 years, the relationship between them is relatively loose. During the crossshareholding period, they mainly obtained investment income, and there was little strategic cooperation. Therefore, the type of cross-shareholding they had was similar to many short-term financial cross-holdings that captures temporary investment income or stock spreads.
Financial cross-shareholding is more of a speculative act than a strategic cross-shareholding that cross-shares for long-term strategic cooperation. This loose relationship may bring short-term benefits to the company, and may also cause the company's investment to fail. The strategic cross-shareholding brings a closer long-term cooperative alliance between enterprises. In addition to the  [8], and optimize resource allocation, rather than just as competitors in the same industry the economic benefits would be higher than the cash dividends obtained, and would benefit the long-term development of the companies.

Cross-Shareholding Can Be Used as a New Way of Reforming State-Owned Enterprises
In order to deepen the reform of state-owned enterprises and realize equity diversification in the 1990s [9], the government guided enterprises to cross-share.
The cross-shareholding relationship between ZHENYE and CHANGCHENG was promoted by the government, but the positive effects brought about during the cross-shareholding period were not obvious. So is this model useful for reference in the process of state-owned enterprise reform? The answer is yes.
ZHENYE and CHANGCHENG were cross-shareholding relationships of financial companies in the same industry. They did not form a strategic partnership and there were also problems of horizontal competition. Therefore, the positive effects of cross-shareholding were hard to come by. If they could carry out cross-industry strategic cross-shareholding, then these constraints would not work. For example, in February 2016, WISCO and China State Shipbuilding Co., Ltd. announced that their respective controlling shareholders intend to transfer part of the shares to COSCO Group without compensation. If the transfer is completed, cooperation between upstream and downstream enterprises of steel, ships and shipping will be formed. The cross-institutional cross-industry of these three companies is not a simple financial investment behavior, but can promote business collaboration and industry chain integration between enterprises. Such behavior will reflect the positive effects of cross-shares and also inject new vitality into the reform of state-owned enterprises.

Conclusion
ZHENYE and CHANGCHENG obtained cash inflows and financing funds during the cross-shareholding period, but could not solve the problem of inflated capital and horizontal competition, and played a limited role in resisting hostile

Conflicts of Interest
The author declares no conflicts of interest regarding the publication of this paper.