Domino effects end when the last tile topples. Hong Kong stocks juddered this week on fears a first piece had tipped. The share price of developer Jiayuan International flash-crashed 80 per cent in minutes on Thursday. Fears it would be unable to repay an outstanding bond turned out to be unfounded. This did not stop a broader sell-off — including fellow mainland developer Sunshine 100.

One possible culprit for the sell-off: the forced sale of shares used as collateral for loans. If so, investors can expect further volatility.

So-called “equity pledge” finance has soared in China since it appeared about five years ago. The practice allows large shareholders, often executives and board members, to borrow from banks and brokers using their shares as collateral. Tumbling prices have put many of these positions underwater over the past year.

As China’s property market cools, fears are growing over access to financing for companies. A clampdown on shadow bank lending has crimped credit. Measures to contain equity pledging have also been introduced.

The Bank for International Settlements estimates the contract value of pledged shares for 3,500 mainland-listed companies was Rmb6.3tn ($930bn) at the end of last year. A fifth of those companies had 30 per cent or more of shares pledged. As Chinese stocks have fallen, the BIS thinks up to 50 per cent of pledged stock is at or near values where lenders could liquidate positions. Mainland property companies have been some of the biggest borrowers, says Wind Info.

The Hong Kong-listed companies hit on Thursday had borrowed from mainland lenders using equity pledges. Back in 2015, it was margin lending — increasingly-expensive stocks used as collateral for more share purchases — that was largely to blame for an eventual Chinese stock crash. Equity pledging is the latest threat to stability.

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