New measures check risk of lending on pledged shares
Chinese authorities have taken a series of measures recently to ease the risk of pledged shares.
The measures include providing liquidity to listed companies via financial investments.
Share-pledging refers to shares being pledged as collateral for loans.
This type of lending has grown strongly since 2014 before moderating this year, driving up operating risk for securities companies because of the practical difficulties they face in selling underlying stock collateral in a timely fashion.
Recent stock market volatility has added to the liquidity and credit risk of these loans by reducing the coverage ratio of pledged shares as collateral, said Moody’s in its latest credit outlook report.
The Securities Association of China announced on Oct 22 that Chinese securities companies will set up a special scheme to reduce risk on lending on pledged shares.
The scheme has seed funding of 21 billion yuan ($3 billion) contributed by 11 securities companies and has a target of 100 billion yuan, which the association aims to achieve by attracting additional money from banks, insurers, State-owned enterprises and government investment platforms.
If successfully implemented, the scheme will be credit-positive for Chinese securities companies because it will reduce their credit risk on their lending on pledged shares and reduce the potential for impairment losses, according to Moody’s.
“We believe the investments will ease the liquidity pressure that pledge borrowers face in refinancing maturing pledged-stock loans. The investments will also fulfill potential margin calls, thus lowering the credit risk that securities companies face,” Moody’s said in its report.
“Moreover, the Securities Association of China’s pledge that the scheme will be run by securities companies under commercial operating principles is likely to restrict its support to only those listed companies with strong credit standings. This reduces the operational and moral hazard risk if the scheme is implemented successfully,” the report said.
Three days after the SAC’s announcement, the China Banking and Insurance Regulatory Commission posted a notice on its website, allowing insurance asset management companies to set up special financial products to invest in listed companies.
The investment targets of these products include shares of listed companies, publicly issued bonds of listed companies and their shareholders, and non-publicly issued exchangeable bonds of the shareholders of listed companies.
Insurance companies, along with institutional investors such as the National Council for Social Security Fund and the asset management products of financial institutions, will become major investors in the