The Impact of China’s Looser Restrictions on Pledged Stock Borrowing Transactions
In 2018, the Shanghai Stock Exchange and the China Securities Depository and Clearing Corp. (CSDC) announced new regulations that placed severe restrictions on pledged stock repurchase transactions. The primary restrictions, which took effect in March 2018, limited stock loan agreements to three-year terms, required borrowers to obtain loans of at least 500,000 yuan (US$774,000), and capped the loan to value ratio in a stock loan transaction at 50%.
In the several months that followed the implementation of these restrictions, share prices on China’s two major exchanges went into an extended downward spiral. That drift was a reflection of a cooling Chinese economy, but the general depression in Chinese stock prices was exacerbated by the new stock lending restrictions, which forced lenders to liquidate their holdings to raise capital. That liquidation added to the downward pressure on prices.
To their credit, Chinese regulators acted quickly. In January 2019, both the Shanghai and Shenzhen stock exchanges loosened restrictions to allow borrowers to extend loan terms beyond three years. Thus, borrowers that have pledged publicly-traded shares on Chinese exchanges as collateral for loans will no longer be under pressure to liquidate other holdings to pay off those loans on a short, three-year deadline.
The Chinese exchanges are also offering exemptions from regulations and are allowing shareholder-borrowers to pledge additional shares or to take new loans to refinance or pay back stock loans that are coming due or that may have already gone into default. Apart from an exemption, a listed company’s shareholders are precluded from pledging more than 50% of the company’s issued and outstanding shares as collateral for loans. Other restrictions limited the percentage of shares that individual brokerage houses and asset management firms could hold as collateral for securitized stock loans.
The prominence of stock lending and pledged stock transactions on the Chinese exchanges is apparent from statistics gathered at the end of 2018:
- shares listed on the Chinese exchanges and pledged as collateral for loans had an aggregate value of approximately 2 trillion yuan (US$295 billion), which reflects a 100% increase from 2016 when pledged stock loans first exceeded 1 trillion yuan;
- pledged shares accounted for almost 5% of the market capitalization of shares on the Shanghai and Shenzhen exchanges;
- more than 1,400 companies with listed shares, which account for more than 40% of the total number of companies listed on the Chinese exchanges, had their shares pledged as collateral for stock loans.
The markets reacted quickly to the loosening of these restrictions and other efforts from the Chinese government to support share prices on China’s exchanges. By March 2019, the Shanghai Index rose by 1.7% and an index tied to the CSDC rose 2.4%. Investors that trade shares on those exchanges are now free to pledge those shares and to realize immediate cash liquidity with no restrictions on loan proceeds. This further frees investors to avoid the immediate capital gains tax consequences of selling shares. It also enables investors to maintain the primary and strategic components of their investment portfolios without disturbing any targeted asset allocations and to avoid selling stocks at depressed prices into bear markets.
Astor Capital Fund has closely followed the developments in the imposition and loosening of the pledged stock loan restrictions on the Chinese markets. We offer securities lending services and stock loans that can be collateralized with unrestricted shares that are traded on either of China’s major exchanges. Our regulatory advisors have structured our loan products and offerings to be fully in compliance with applicable regulations on those markets. Depending on regulations, we are able to offer loans with loan-to-value ratios of up to 70% and for 3 to 10-year terms. In most cases, our advisors can close loans within thirty days after a prospective borrower submits a complete loan package to our underwriters.
Astor Capital Fund is also a premier international lender for collateralized stock loans on all major international markets. Our loan consultants emphasize to all prospective that pledged stock loan transactions are intended only for sophisticated securities investors who understand the laws, rules, and regulations of the markets in which they focus their investing efforts, as well as the risks that are attendant to pledging securities as collateral for a non-recourse loan. Astor Capital Fund and its consultants do not offer financial, legal, or tax advice concerning any pledged stock loan transactions, nor do they solicit any investors to purchase or sell securities directly to or from Astor Capital Fund or any third-party entities.