What is Cross-Shareholding?
Cross-shareholding refers to the phenomenon where different companies hold shares in each other to achieve specific strategic objectives.
Cross-shareholding first emerged in Japan during the "Yowa Real Estate Incident" in 1952. After the company was targeted in a hostile takeover, the Mitsubishi Group restructured its internal operations. In 1953, following amendments to Japan’s Anti-Monopoly Act, Mitsubishi subsidiaries adopted cross-shareholding to prevent hostile takeovers via the secondary market. From then on, cross-shareholding became a widespread anti-takeover strategy in Japan. In the 1950s, Japanese firms also used it to maintain close ties with banks for easier access to capital.
The second wave of cross-shareholding occurred in the late 1960s during Japan’s foreign investment liberalization phase. As the U.S. and other Western nations increased FDI (foreign direct investment) into Japan—particularly in key industries like automotive—Japanese firms responded defensively. Toyota was the first to adopt mutual shareholding to block foreign takeovers, followed by Nissan, Isuzu, Hino, and Daihatsu.
While cross-shareholding successfully prevented hostile takeovers and strengthened bank-corporate relationships, it also weakened shareholder oversight of management. Nevertheless, it played a crucial role in Japan’s asset revaluation phase in the late 1980s. Excessive money supply, yen appreciation, and liquidity surges inflated domestic asset prices, fueling a stock market bubble. Cross-shareholding further amplified this bubble, driving the market to speculative highs.
Cross-Shareholding in China
Cross-shareholding emerged in China in the early 1990s. At the time, Chinese firms faced capital shortages, and inter-corporate shareholding artificially inflated registered capital. Many large state-owned enterprises (SOEs) used this method to quickly meet listing requirements during shareholding reforms. Non-tradable corporate cross-holdings reinforced management control while maintaining the "public ownership" framework, leading to rapid adoption.
Risks of Cross-Shareholding
In Japan, excessive cross-shareholding inflated real asset prices, which eventually spilled over into the stock market, creating massive bubbles. During the 1987-1989 bull market, firms like Mitsubishi Heavy Industries and Nippon Steel vastly outperformed the Nikkei Index. However, since this growth was not value-driven but relied on interlinked ownership chains, the collapse of one firm could trigger a domino effect.
Similarly, the self-reinforcing rise of cross-held stocks in a bubble market inevitably peaks. Once the mechanism breaks—due to liquidity crunches or unsustainable earnings—a systemic crash follows. Japan’s decade-long bear market after 1990 was partly caused by cross-shareholding. The domino effect created a paradox: sharp declines triggered even steeper drops, erasing vast amounts of market value.
