Margin financing of PE funds seen key factor in A-share slide

July 13, 2015 10:45
Financing activities involving PE players and trust funds may have contributed to the steep drop in equity prices in China recently, says Chen Yao of Bank of Chongqing. Photo: Ta Kung Pao

A form of financial activity similar to margin financing that involves private-equity players may have been a key factor behind the recent stock market rout in China, according to a mainland banker.

Cut-loss clauses in the terms and conditions of some trusts in which some private-equity funds are involved may have forced the funds to exit, said Chen Yao, general manager overseeing risk management at Bank of Chongqing Co. (01963.HK).

PE funds may have sought to bring down their leverage and opted for liquidation activities, contributing to the steep slide in equity prices, the Hong Kong Economic Journal quoted Chen as saying. 

As trusts pool together funds raised from high-yield and principal-guaranteed financial products and private-equity players, some entities are leveraged to a great degree through a route similar to margin financing, Chen was quoted as saying in a phone interview.

When share prices of linked securities fall to certain levels, top-up clauses are triggered, leading to players scrambling for funds and causing a domino effect.

A total of 1.6 trillion yuan of money raised through such financial products and capital financing activities of private-equity firms has flown into the stock market, according to research from Huatai Securities Co. (601688.CN).

[Chinese Version中文版] 

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Hong Kong Economic Journal