Hong Kong and A-share markets may appear to have stabilized for now, but investors have to watch out for another crisis: the day when around half of the stocks in mainland China resume trading.
In the past few days, over 1,000 Chinese companies have applied to have their shares suspended from trading in a bid to avoid the market turbulence.
A small number have resumed trading, but a lot more will follow as market stabilizes further.
Some investors joked that they feel lucky the shares they are holding have been suspended.
“A trading halt is the best way to stop the stocks from falling any further,” a retail investor told Yicai.com.
But there are more at stake, and the suspension could result in more damage down the road.
Why do so many companies want to have their shares suspended?
A brokerage manager from Shanghai told Yicai.com that many major shareholders have used their stocks as collateral to borrow money from banks.
So if share prices drop and their collateral value declines, banks may have to ask the shareholders to pay up.
Fund managers in a hurry to raise money to meet redemption requests were forced to sell shares still being traded in the bourses, creating a even bigger selling pressure in the already panicky market, which was what happened in Wednesday.
Experts suggest that investors watch out when suspended shares resume trading. The A-share and Hong Kong markets may experience a second hit in the near future.
When a counter is suspended, that means it has lost its liquidity completely. Shareholders have no way to get out and pair down their risks. So when trading resumes, those who want to sell may rush to unload their positions, creating an even bigger selling pressure.
In an interview with CNBC.com, Alex Wong Kwok-ying, director of asset management at Hong Kong-based Ample Capital, said the suspension of trading is a particularly “stupid move”.
“The trading suspension strategy is a double-edged sword, it is just an act of deception,” Wong warned.
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