October 18, 2018 / 9:50 AM / 2 months ago

China regulator asks creditors to avoid forced margin calls on environmental firm's shares

BEIJING/SHANGHAI (Reuters) - A branch of China’s securities regulator has asked creditors of a Beijing-based environmental firm not to force margin calls on pledged stocks they hold of the company, underscoring official concern over margin lending risks and their impact on financial markets.

A document issued by the Beijing branch of the China Securities Regulatory Commission (CSRC) shows that it asked 28 creditors of Beijing Orient Landscape & Environment Co. (002310.SZ), including CITIC Securities Co. (600030.SS) to be “prudent” in their disposal of shares pledged for loans by Beijing Orient’s controlling shareholder at a recent meeting, three sources with knowledge of the matter said.

Beijing Orient acknowledged the meeting in an emailed response to questions, saying it was a “preventative measure” by regulators in light of recent market fluctuations.

Data from China Securities Depository and Clearing Co. (CSDC) show that 46 percent of Beijing Orient’s outstanding shares were pledged for loans as of Oct. 12, the most recent day for which CSDC has public data.

Rising risks posed by margin lending - the practice of borrowing against large blocks of shares - have drawn widespread concern in China's equity markets amid a share price slump driven by concerns over slowing growth and a worsening trade war with the United States. The Shanghai Composite index .SSEC touched its lowest levels in nearly four years on Thursday, driven lower by such concerns.

In reducing the risk of forced margin calls and the possible freezing of company assets, the Beijing CSRC’s move to seek cooperation from Beijing Orient’s creditors shows the intent of creditors to prevent broader market risk.

In its email, Beijing Orient said the company did not face margin call risks, and that its operations were not affected by share pledges. It said the share pledges by its controlling shareholder were “within safe limits.”

Beijing Orient shares had fallen about 43 percent from late August through Wednesday, but jumped 1.6 percent on Thursday amid a wider sell-off after the company said its owners were planning a stake sale to alleviate margin call pressures.

The company, which engages in wastewater treatment projects, has struggled to raise funds this year, and was forced to cancel a bond issue in May due to weak demand.

The CSRC did not immediately respond to a request for comment.

More than 637 billion shares worth 4.44 trillion yuan ($639.86 billion) were pledged for loans as of Oct. 12, according to Reuters’ calculations based on CSDC data.

(This version of the story has been refiled to fix spelling of “environmental” in headline)

Reporting by Xiaochong Zhang and Andrew Galbraith; Editing by Sam Holmes

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