China’s main stock exchanges have asked banks and other share-based lenders to be more lenient in extending agreements on loans in which shares have been undertaken as collateral, as authorities attempt to bring stability to the world’s worst performing securities market, reports the Financial Times.
Putting up a large proportion of a listed company’s stock in order to access loans is a common practice in China, with many small- and medium-sized companies having been known to pledge more than 40% of their companies’ stock. Pledges skyrocketed in 2017, but eventually dropped from its peak in October 2018.
When borrowers are unable to pay back their loans, or when share prices drop below a certain level, banks can take over the shares, and should the bank decide to sell those shares, the consequence could end up being a sudden drop in stock value.
This has led to RMB 4.4 trillion ($650 billion) worth of shares being on the line, or about 9.75% of total market capitalization, according to Wind Info.
China has been aiming to avoid sharp sell-offs, a factor that added to the more than 25% decline in China’s benchmark CSI 300 last year. It was the worst-performing major market in the world in 2018 but the index is up more than 7% since the start of this year.
“It alleviates some risk for a disorderly sell-off in stocks,” said Felix Lam, a senior fund manager of Asia-Pacific equities at BNP Paribas Asset Management. “By delaying the process [of selling off stocks] it could help stabilise the market.”