New mea­sures check risk of lend­ing on pledged shares

China Daily (Latin America Weekly) - - Front Page - By JIANG XUEQIING jiangx­ue­[email protected]­nadaily.com.cn

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

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