Listed Chinese companies are being forced to halt trading as their owners attempt to unwind risky bets they have made pledging company stock for loans.
As China tightened access to credit in 2017 to address its mounting corporate debts, controlling shareholders in many smaller listed companies used their shares as collateral for credit.
But market jitters since the start of this month have pushed companies to warn their shareholders that they could face margin calls as share prices fall.
Shenzhen-listed Shenwu Environmental Technology was one of at least 20 groups in February that has stopped trading because of the risk of a “margin call”, where a share price decline triggers a demand to top up any money borrowed to buy the stock.
A margin call often forces a sell-off of the stock to raise this money and can lead to a collapse in the share price.
China’s tighter controls over credit last year led to a wave of share pledges by listed groups: as of mid-December, shareholders in 317 Shanghai and Shenzhen-listed companies had pledged at least 40 per cent of their stock, compared with 224 companies a year earlier.
Pledged shares for loans is one means that the companies have to access funding outside the traditional banking sector. Many others have borrowed from “shadow” lenders, often at high costs.
“This is all part of the deleveraging campaign,” said Hong Hao, head of research in Bocom International in Hong Kong. “The owners of these companies have had to pledge shares just to get access to capital.”
Shenwu noted in a regulatory filing that its controlling shareholder has pledged more than 40 per cent of the group’s shares and was now in discussion with the margin lender.
China’s securities regulator has started looking into the use of stock as collateral for loans, the state-owned newspaper Securities Times reported. In some cases, companies have noted in regulatory filings that the securities regulator is investigating the shareholders that have pledged the stock.
Many smaller listed companies in China are facing a slowdown in growth. Partly because it is trying to cut debt, China’s growth is likely to slow in 2018, a factor that has weighed on the performance of many of Shenzhen’s small-cap companies.
Shenzhen’s tech-focused ChiNext index has been falling gradually since 2015, but fell around 12 per cent between January 25 and February 9.
“Some of these companies are heading toward dangerous territory,” said one Shanghai-based analyst at a global bank, who noted it was not normal for companies to halt trading because they faced the risk of margin calls.
But the halting of trading to deal with problems could be a good sign, Mr Hong said.
In the past, shareholders facing margin calls would likely have been forced to sell off the stake without warning, he said. But China’s securities regulator has recently given companies permission to allow shareholders to work through problems with debtors instead of selling up to pay back loans.
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