SHANGHAI (BLOOMBERG, REUTERS) - China's banking regulator said it will allow lenders to roll over loans backed by shares when they mature and adjust collateral requirements, adding to government efforts to contain the effects of a market plunge that has seen the country's bourses lose a third of their value in around a month.
The China Banking Regulatory Commission also encouraged banks to support companies' share buybacks by offering them collateralized loans, in a statement on Thursday. The agency loosened requirements for banks to sell stocks that have fallen in value, under agreements with clients of wealth-management and trust products. It encouraged banks to offer loans to China Securities Finance Corp., an agency that helps to supply credit for stock purchases.
One of the side-effects of the stock market's collapse from a June 12 peak was to diminish the value of shares pledged as collateral for loans from banks and brokerages. As of Wednesday, that pool of stock was valued at 1.9 trillion yuan ($306 billion) and comprised shares in 1,170 companies, according to Wind Information data.
"The bottom line for the government is to prevent contagion to the banking system, which can lead to systemic risks," said Zheng Chunming, a Shanghai-based banking and brokerage analyst at Capital Securities Corp. "Some stocks have tumbled more than 60 per cent, any further drop will start to hurt banks' financial health no matter how low the leverage is."
Shanghai stocks traded wildly on Thursday morning on the beefed up measures. The benchmark Shanghai Composite Index fell as much as 3.81 per cent before rising up to 2.62 per cent. By mid-morning it had gained 0.49 per cent, or 17.17 points, to 3,524.36.
The Shenzhen Composite Index, which tracks stocks on China's second exchange, added 2.05 per cent, or 38.64 points, to 1,923.09.
Earlier on Thursday, China's securities regulator said China Securities Finance Corp, the country's state margin lender, will use money to subscribe to mutual funds in a bid to provide "ample liquidity" to fund companies. The move aims to boost investor confidence, ensure stable operation of the mutual fund industry and stabilize the stock market, the China Securities Regulatory Commission (CSRC) said on its website.
A 32 per cent slump in the benchmark gauge has helped wipe out US$3.6 trillion of market value in Chinese stocks since June 12 and prompted regulators to introduce support measures almost every night for more than a week. Other steps have included a suspension of initial public offerings and restrictions on bearish bets via stock-index futures. Policy makers have also made loans available to securities firms to buy shares.
In perhaps the most dramatic effort to stop the selloff, local exchanges have allowed more than 1,300 companies to halt trading in their shares.
As China's record-breaking equity boom goes bust, President Xi Jinping is intervening in an attempt to prevent the rout from eroding confidence in his leadership. The moves have cast doubt on the Communist Party's pledge less than two years ago to give market forces a bigger role in the economy, which is part of its largest reform drive since the 1990s.
On Wednesday, the market regulator barred big shareholders and executives of listed companies - who have stakes exceeding 5 per cent - from selling their shares for the next six months.
While China has already ordered government-owned institutions to maintain or increase stock holdings, the CSRC directive expands the sales ban to non-state companies and potentially foreign investors who own major stakes in mainland businesses.
That move drew skepticism from foreign investors. The money managers, with combined assets of almost US$4 trillion, say the latest step to stem the country's equity rout is just another measure to meddle in the market and won't be enough to restore investors' confidence.
"It suggests desperation," Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone. "It actually creates more fear because it shows that they've lost control."
"The measure can be effective in the short term because you are not going to allow people to trade," said Jorge Mariscal, the emerging-markets chief investment officer at UBS Wealth Management, which oversees US$1 trillion in invested assets. "But they are undermining the credibility on the soundness of the regulatory framework going forward. Things are a little extreme and counter-productive."
In a sign that foreign investors expect more losses, the biggest US exchange-traded fund tracking mainland stocks tumbled a record 11 per cent in New York. Deutsche X-trackers Harvest CSI 300 China A-Shares ETF has declined 23 per cent over the past week. The Shanghai Composite lost 2 per cent at the open on Thursday.
Under current mainland rules, a single foreign investor can own as much as 10 per cent of a company's issued shares. China has allocated investment quotas of about US$138 billion through its so-called QFII and RQFII programs for foreign money managers, which include BlackRock and HSBC Global Asset Management.
International funds have gained unprecedented access to the mainland market through an exchange link with Hong Kong. Foreigners have sold a net 33.4 billion yuan ($5.4 billion) of Shanghai shares through the link over the last three days.
"The extent to which they can apply this to foreign ownership interest remains to be seen," said Brian Jacobsen, who helps oversee US$250 billion as the chief portfolio strategist at Wells Fargo Funds Management. "They are grasping at straws to find a way to stop the selling pressure."