Date
19 November 2018
With the major shareholders of many listed firms facing trouble due to pledged shares and a stock market slide, some local governments are setting up special funds to bail out such entities. Representative image: Bloomberg
With the major shareholders of many listed firms facing trouble due to pledged shares and a stock market slide, some local governments are setting up special funds to bail out such entities. Representative image: Bloomberg

Another version of China’s 2008 multi-trillion yuan bailout

Shenzhen authorities have vowed 10 billion yuan in assistance to bail out troubled listed firms. And various districts in China’s capital city of Beijing have also unveiled similar measures to support struggling listed private companies.

Among over 3,500 listed firms on the mainland, major shareholders of 2,422 firms have borrowed from financial institutions using shares as collateral.

It’s estimated that nearly 90 percent of listed firms of the private sector have used such financing means.

Major shareholders of these firms are now facing margin squeeze as the Shanghai market has suffered a steep slide, with the key index dipping below the 2,500 points level at one stage last month from 3,350 points at the beginning of this year.

Given the pledged shares and the liquidity problem, the situation, if not handled properly, could trigger a serious panic equities dumping and even threaten the overall economy.

Against such backdrop, Shenzhen Municipal government has set up a 10 billion yuan fund to lend to major shareholders of local listed firms at an annual rate of 9 percent. The loan to value ratio is set at 70 percent. Terms of such financing are far better than market levels.

Meanwhile, Chaoyang, Haidian and Xicheng districts in Beijing have set up funds worth 25 billion yuan, 10 billion yuan and 10 billion yuan respectively, as Beijing Daily reported.

The bail-out funds will be used for helping private companies in liquidity crisis provided they have good track record and focus on real operations.

The district governments will hand out loans or buy shares but won’t seek controlling stakes in the firms being offered help. These funds will introduce other financial institutions as partners.

It’s likely more local governments would follow suit of Beijing and Shenzhen to bail out local firms. The move would help boost economy, secure jobs and contribute to social stability.

There are more than 300 prefectural or higher-level cities across China. That means the size of these bail-out fund platforms of local governments could reach up to one trillion yuan in total.

That has reminded me of the numerous local government investment vehicles that emerged after China’s 4 trillion yuan stimulus package in 2008.

Back then, most of the funds were directed at infrastructure projects to stimulate economic growth. The move immediately bolstered economy, but also created lots of side effects, leading to issues like local government debt crisis, excessive investment, resources misallocation and rampant corruption.

This time, by providing funds to the private sector directly, it could work out better but such plans could still worsen the local government debt burden.

This article appeared in the Hong Kong Economic Journal on Nov 1

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Hong Kong Economic Journal columnist

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