China fails to stimulate markets hobbled by pledged shares

SHANGHAI: is struggling to restore confidence in 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 per cent of total outstanding shares, is a minefield for an economy already battling slowing growth and a trade war with the United States.

Tight credit markets in China means that many companies, especially small and medium-sized enterprises, have scarce recourse to banks or other sources of financing, and policymakers have yet to promise any actual money.

Many of those companies have turned to pledging shares to finance companies as a 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 collateralized loans.

About US$620 billion worth of shares currently trading on markets have been pledged, mostly by small and medium-sized companies.

The practice boomed in 2016 and 2017 as Beijing started weaning companies off borrowing in the shadow sector.

But now, the nearly 20 per cent slump in the broader market this year has triggered margin calls, forced liquidations, ownership changes, business disruptions and defaults for hundreds of listed firms.

Forced liquidations have a disastrous effect on companies involved, said Wang, a partner at Hiways Law Firm.

“The impact to the real economy would be even bigger if the contagion spreads to affiliates and other businesses along the value chain,” he said.

During the market slump of 2015/16, 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 firms facing risks of forced liquidations.

That means the private sector, which drives half the economy and generates the bulk of jobs, is going to face huge funding problems, unless Beijing steps in with state money.

Beijing threw money at the problem in 2015, even asking state-owned funds to buy shares. Now, it is asking private sector funds to help these companies.

Chinese Vice Premier Liu He, governor Yi Gang, as well as China’s securities, and banking and regulators, have called for private funds to pump money into struggling listed companies. – Reuters

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Source: Borneo Post Online

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