As Chinese stocks traded near four-year lows amid concerns over the economy and worries over margin calls, the nation’s top financial officials sought to shore up market confidence last Friday, with various local governments also pumping money in a bid to underpin the tumbling equities.
China’s A shares have slumped more than 25 percent this year, and many big stockholders are said to have received margin calls as shares pledged by them as collateral for loans have diminished in value, prompting some “forced selling”.
There are fears that such forced share sales could trigger a financial crisis.
Amd this situation, China’s Vice Premier Liu He, People’s Bank of China (PBoC) governor Yi Gang, China Securities Regulatory Commission (CSRC) chairman Liu Shiyu, and China Banking Regulatory Commission (CBRC) chief Guo Shuqing have engaged in a rare show of coordinated verbal support for the market.
The CBRC said it plans to allow the wealth management subsidiaries of banks to invest product funds into stocks and scrap the minimum investment requirement for investors. Meanwhile, Liu vowed to encourage private-equity funds to buy shares in listed firms, support share buy-backs and speed up approval for mergers and acquisitions.
The PBoC, on its part, pledged to ensure stable market liquidity and push forward plans to support bond financing for private firms and study measures to alleviate the sector’s financial difficulties.
The State Council, meanwhile, urged the NPC Standing Committee, the nation’s top legislative body, to revise the Company Law and allow listed firms to buy back shares, a move that would help support share prices.
These rare coordinated moves by regulators came against the backdrop of escalating US-China trade tensions, weakening yuan and capital outflow. The Shanghai Composite Index plunged to 2,449 points last week, down about 27 percent from 3,350 points at the beginning of this year. Some small and medium-cap stocks suffered even bigger falls.
What makes the market slump alarming is the common practice in China where major shareholders would use their stock as collateral to borrow money from financial institutions. Now, most of them are receiving margin calls as share prices went into free fall.
For the investors who are unable to deposit further cash, they will be forced to unwind their bets, thereby amplifying the selling pressure on the market.
It’s estimated that 68 percent of 2,422 listed firms in Shanghai and Shenzhen have reported that their key shareholders had resorted to such financing. Therefore, a market slide could trigger a heavy sell-off and threaten the broad economic and financial stability.
To prevent the situation from worsening, local governments have offered financial support for listed firms. For example, Shenzhen’s State-owned Assets Supervision and Administration Commission has set aside 10 billion yuan to lend to major shareholders of listed firms. The shareholders can obtain 70 percent value of their shares at an annual rate of 9 percent, which is much better than the market rate.
It’s obvious that the local governments are offering more margin financing for these shareholders. As a result, they now have sufficient funds to buy back shares from brokerages.
It’s reported that many major shareholders of listed firms in Shenzhen have already avoided the margin calls with the help of funds offered by the local government. The municipal government is said to have set up a work group to arrange several dozen billion yuan in funds as it seeks to mitigate risks stemming from margin financing.
There are a large number of small and mid-cap tech stocks in Shenzhen. The counters have taken a big beating amid the prevailing macro and other concerns.
It’s difficult to say whether the A shares have bottomed out. But the assurances by the top financial regulators and the moves by local governments do help mitigate some valuation risks.
The market may stabilize in the short term, but the longer-term prospects still hinge on the economic fundamentals and the developments in relation to the Sino-US trade battle.
This article appeared in the Hong Kong Economic Journal on Oct 22
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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