IFR Asia - October 27, 2018

People

&Markets

Pledged shares

hobble China

stock market

#HINAûISûSTRUGGLINGûTOûRESTOREûCONlDENCEûINû

its stock markets, which are being weighed

down by a massive amount of shares that

have been pledged as collateral as credit-

starved companies seek to raise funds.

Analysts say the practice, which involves

10% of total outstanding shares, is a

MINElELDûFORûANûECONOMYûALREADYûBATTLINGû

slowing growth and a trade war with the

United States.

4IGHTûCREDITûMARKETSûINû#HINAûMEANû

that many companies, especially small

and medium-sized enterprises, have scarce

recourse to banks or other sources of

lNANCINGûANDûPOLICYMAKERSûHAVEûYETûTOû

promise any actual money.

Many of those companies have turned to

PLEDGINGûSHARESûTOûlNANCEûCOMPANIESûASûAû

way of raising cash.

“Using pledged shares to borrow has

become a very popular, and very important

funding tool,” said Wang Jin, a Shanghai-

based lawyer who is dealing with an

increasing number of disputes involving

collateralised loans.

About US$620bn worth of Chinese shares

currently trading on Chinese markets have

BEENûPLEDGEDûMOSTLYûBYû3-%Sû4HEûPRACTICEû

BOOMEDûINûûANDûûASû"EIJINGûSTARTEDû

weaning companies off borrowing in the

shadow banking sector.

But now, the nearly 20% slump in the

broader market this year has triggered

margin calls, forced liquidations, ownership

changes, business disruptions and bond

DEFAULTSûFORûHUNDREDSûOFûLISTEDûlRMS

Forced liquidations have a disastrous

effect on companies involved, said Wang, a

PARTNERûATû(IWAYSû,AWû&IRMûh4HEûIMPACTûTOû

the real economy would be even bigger if

THEûCONTAGIONûSPREADSûTOûAFlLIATESûANDûOTHERû

businesses along the value chain,” he said.

$URINGûTHEûMARKETûSLUMPûOFû

û

over 1,000 companies suspended share

trading to avoid margin call risks. But

regulators have now tightened rules for

share suspension, giving no buffer to listed

lRMSûFACINGûRISKSûOFûFORCEDûLIQUIDATION

HUGE FUNDING PROBLEMS

4HATûMEANSûTHEûPRIVATEûSECTORûWHICHû

drives half the economy and generates the

bulk of jobs, is going to face huge funding

problems, unless Beijing steps in with state

money.

4HEûGOVERNMENTûTHREWûMONEYûATûTHEû

PROBLEMûINûûEVENûASKINGûSTATE

OWNEDû

funds to buy shares. Now, it is asking private

sector funds to help these companies.

6ICEû0REMIERû,IUû(EûCENTRALûBANKû

GOVERNORû9Iû'ANGûASûWELLûASû#HINASû

securities, and banking and insurance

regulators, have called for private funds

to pump money into struggling listed

companies.

4HATûPUSHEDû3HANGHAIûSTOCKSûUPûû

on October 19 and 4.1% last Monday. By

Wednesday, however, markets moved

lower as investor worries returned.

ASSET MANAGEMENT SCHEME

4HEûMOSTûCONCRETEûMEASUREûANNOUNCEDû

so far to address market fears has been an

asset management scheme unveiled last

Monday by an industry association that

TARGETSûSTRUGGLINGûLISTEDûlRMSû"UTûTHEû

INITIALû2MBBNû53BN ûCOMMITMENTû

from 11 brokerages pales in comparison

to the nearly Rmb3trn worth of pledged

shares that some estimate face margin calls.

h4HEREûARENTûCONCRETEûPOLICYûMEASURESû

being rolled out, and no new money is

promised,” said Hong Hao, chief strategist

at BoCom International.

4HEûWIDESPREADûPRACTICEûOFûBORROWINGû

against share holdings has led to shares

OFûûOUTûOFûûCOMPANIESûLISTEDûONû

China’s start-up ChiNext board being

pledged for loans. By mid-2018, 16% of

Chinese domestic A-shares were pledged on

AVERAGEûCOMPAREDûWITHûûINûMID

û

according to Evergrande Research Institute.

Many analysts suspect that government

rhetoric will only delay, but not defuse, the

implosion of the massive “pledged shares”

MINElELDûAMONGûSMALLERûCOMPANIESûnûONEû

of the biggest woes plaguing China’s stock

market.

h2ISKûIS   ûUNDERûCONTROLûWITHûTHEû

exception of some small-to-mid caps,”

WROTEû'AOû4INGûHEADûOFû#HINAûSTRATEGYûATû

UBS Securities last Monday.

Who’s moving where...

„ FITCH (CHINA) BOHUA

CREDIT RATINGS, the

newly created China

domestic rating

agency of Fitch, has

appointed Danny

Chen as its chief

executive.

Chen’s previous

positions include

chief executive of

Qingdao Conson

Financial Holdings, a

state-owned financial

holding company in

Qingdao, and chief

credit officer and chief

rating officer at China

Lianhe.

Fitch previously

held a 49% stake

in Lianhe before

selling its shares

to Singaporean

sovereign wealth fund

GIC earlier this year.

„ Qing Liao, until

recently a senior

director with S&P

in Beijing, has

been appointed an

independent director

at BANK OF CHINA.

Liao, who spent

13 years with S&P

covering China’s

banks, left the rating

agency in June.

He previously

worked for two

years at the China

Banking Regulatory

Commission and also

spent just over four

years at the People’s

Bank of China.

Many analysts suspect that government rhetoric will only delay,

but not defuse, the implosion of the massive “pledged shares”

minefield among smaller companies – one of the biggest woes

plaguing China’s stock market.