SHANGHAI Jan 29 Chinese companies may be forced
to sell at least $12 billion in shares in coming weeks to meet
margin calls, dealing a further blow to stock markets which have
already seen some $2 trillion in value wiped out so far this
Some companies that had pledged shares as collateral for
loans are now faced with a stark choice - dump them under
pressure from impatient brokers and banks and book a loss, or
stump up fresh cash or other assets to make up for the
difference in value.
If that wasn't enough to dash hopes that China's markets
will soon claw back from 14-month lows, fresh selling pressure
is coming from mutual funds and hedge funds which are
liquidating positions as shell-shocked investors race to
withdraw what cash they have left.
All that is leading to a vicious cycle where further share
price drops are likely to trigger more margin calls and threaten
further forced sales.
"Over half of all listed companies in China have their
shares pledged, so if the market falls further, this issue could
become a systemic risk," said David Dai, a Shanghai-based
investor director at Nanhai Fund Management Co.
Some analysts had already believed that the Shanghai
Composite Index could fall another 6 percent to test the
psychologically important 2,500-point level, where its stunning
but eventually short-lived rally took off late last year.
"If the market continues to fall, equity pledging-related
selling pressure could increase significantly," said Gao Ting,
head of China strategy with UBS Securities.
"When a position has to be closed for transactions using
floating shares as collateral, the pledger sells on the
secondary market, putting further pressure on the stock market."
On Thursday, trading in shares of Maoye Communication and
Network Co Ltd was halted after it said it received
notice that its controlling shareholder faces margin calls, one
of at least eight companies that have made similar announcements
so far this year.
In a stock exchange filing, it said it would announce
measures soon to deal with the issue. The stock has lost 45
percent of its value in the last month.
Given the 25 percent slide in shares within weeks, the total
number of such companies in similar straits is likely to be much
higher, but they do not have to report margin calls.
According to UBS, over 1,350 Chinese listed companies have
entered into transactions involving equity pledging since 2015.
As of Tuesday, 155-to-214 stocks had hit position-closing
levels, with pledged shares in question worth about 79 billion
yuan to 85.7 billion yuan ($12-13 billion).
UBS estimates that pledged shares facing margin calls could
triple if the market falls a further 10 percent.
In the more transparent margin lending business at
brokerages, where investors borrow money to buy stocks, the
pressure is already obvious.
As the market tumbles, outstanding margin loans have
declined for 20 sessions in a row - the longest such streak on
record - with over 100 billion yuan worth of leveraged bets have
been unwound this month alone.
But with such loans still at an estimated 913 billion yuan,
there's plenty of room for more deleveraging, and more downward
pressure on markets, which could trigger fresh margin calls.
"There's obviously more room for deleveraging, but no one
knows what is the appropriate level of leverage," said Wang Yu,
analyst at Pacific Securities.
China's securities regulator has tried to downplay margin
risks this year, saying in January that risks from margin calls
were controllable, and the market impact limited. But a flurry
of reassurances from authorities in recent weeks on everything
from stock markets to the yuan currency and the slowing economy
has done little to calm the nation's panicky investors.
Another source of risk is coming from the fund industry,
where many products face potential liquidation as investors keep
cutting exposure to riskier assets.
The latest data from Shenzhen Rongzhi Investment Consultant
Co shows that of the 5,566 hedge fund products it tracks, 781
have lost more than 20 percent of their net value (NAV) since
launch, while 342 have lost more than 30 percent.
"The real situation could be much worse, because many hedge
funds have chosen not to disclose their NAV," said Li Shu,
With most hedge funds having set a loss of 25-30 percent as
the liquidation line, "there is real pressure on the market,
because fund managers would be forced to liquidate their stock
So far this year, about 125 hedge fund products have been
liquidated, according to Rongzhi.
Mainland stock funds saw their assets under management (AUM)
slump nearly 90 percent in the June-December period, which saw
the worst of the market rout, to 765.7 billion yuan.
"Further slides would accelerate the stampede," said Tian
Weidong, analyst at Kaiyuan Securities.
($1 = 6.5744 Chinese yuan)
(Reporting by Samuel Shen, Nathaniel Taplin and Pete Sweeney;
Editing by Kim Coghill)