Quick Take: Making money on China’s new market

Recent reports from Bloomberg, Reuters and SCMP would leave readers with the impression that China’s ‘New Third Board’ stock market, NEEQ, is a “booming” and “thriving” “little secret”. Thanks to the problems on China main stock markets over the past year, and a big IPO backlog, many firms have listed on NEEQ, which now hosts 8,622 companies, up 68% from end-2015. But Chinese media reports indicate the market’s liquidity is drying up, with half of the listed companies yet to register any trading of their shares. Big price swings and several suspected cases of market manipulation have left many professional investors wary. Buyer interest is down, which prevents shareholders from offloading their stakes in the market to raise funds, forcing some to take a less conventional route.
Some company bosses, the media reports say, have been pledging their shares as collateral to raise loans from the banks, then defaulting on the loans, giving up their shares, and effectively exiting the market with the loan money. Eastmoney’s Choice data service says that using NEEQ shares as collateral earns 10%-30% equivalent in cash.
According to a report by Guangzheng Hangseng Advisory, the number of cases of pledging NEEQ shares as collateral has increased 385% this year, and with a rising number of related defaults, Chinese banks have turned cool on accepting NEEQ equity as collateral. Instead, internet finance platforms have stepped in. Recent data from WDZJ.com indicates these P2P platforms are offering money in return for NEEQ-listed shares as collateral, thereby shifting default risks onto their retail customers.