简体中文
The new stock-pledged repo measures published by China’s two main bourses with the aim of curbing reckless borrowing by major stockholders took effect on Monday after a two-month grace period.
A pledged repurchase agreement (repo) is a derivative fundraising tool used by stockholders in China’s stock exchanges to raise funds for quick transactions. Shareholders agree to buy the derivative back at a prearranged date.
A stock pledged repo transaction involves a repo seller pledging their stock assets as collateral to the repo buyer, which lends money at a certain interest rate for short periods.
The new regulation on stock pledging was released as Chinese shareholders, those of small- and mid-cap companies in particular, have been ramping up borrowing against stocks, driving up revenue for brokers and dealers but creating risk of a chain reaction in the event of a sharp market downturn.
Stock pledging can amplify a market downturn. If a company’s share price drops below a designated stop-loss level, the lender will liquidate the pledged shares, pushing the share price down even further.
The new provision caps the value of loans secured by shares at 60 percent of the market value of the pledged shares, ensuring a buffer that will protect the lender in case of a share price dip.
It also stipulates that the overall pledged shares of a single stock shall not exceed 50 percent of the total number of shares outstanding, and a securities firm or an asset management product shall not accept collateral shares exceeding 30 percent or 15 percent respectively of a stock’s total shares outstanding.
After the new rules were announced, the pledged shares in January on the Shanghai Stock Exchange accounted for an average 42.5 percent of the total shares, down from 43.67 percent by the end of 2017, according to data from the bourse.
Meanwhile, the stock pledged repo trading volumes on the two bourses in Shanghai and Shenzhen have also been constrained.
The trading volumes in January increased 3.019 billion yuan on a month-on-month basis, while the figure stood at 32.127 billion yuan in December.
(CGTN)
