Financing options just got tighter for Chinese seafood firms listed in China, after the government limited “share pledges” to stabilize the equity market.
Share pledge financing, whereby companies use equities as collateral to obtain loans, appears to have been curtailed by the federal government after the market saw a slew of so-called “share pawns” notices from firms including Baiyang Industrial Investment Group and Guolian Aquatic, which announced pledges on shares had been canceled. Guolian said its pledge on a block of shares had been cancelled by one of its main shareholders, Guanlian International, which had pledged more than half its 40,000 shares in Guolian.
A recent research paper by Haitong Securities – one of China’s leading brokerages – estimated that pledged stocks account for 8.5 percent of the total market value of A-shares (the term refers to listings on either the Shanghai or Shenzhen stock markets) and most A-listed firms had pledges outstanding on their stock as of September 2019.
Borrowers are usually required to sell their shares if they fall below a certain agreed level, in order to reimburse the lender. But this has led to turbulence on the equities markets as a weak corporate outlook has worried investors.
Applications for trading suspensions – a means by which companies with falling share prices sought to arrest the decline – rose significantly in 2018. Anecdotal evidence suggests some firms last year had pledged up to one-third of their shares. That trend has led China’s main market regulatory body to move to prevent growing risk to stock market stability by forbidding the practice of suspensions in cases of share-pledging.
A recent statement from the Shanghai Stock Market explained how the market is clamping down on stock pledges.
“The pledge of shares is a common commercial financing behavior conducted by the shareholders in using their shares. In recent years, due to a variety of factors, the high-proportion pledges by the shareholders of listed companies have been on the rise, and the resulting risks have also drawn extensive attention from the market participants,” it said. “The China Securities Regulatory Commission (CSRC) has taken various measures for controlling the increments and reducing the stocks so as to push the companies to prevent and defuse the risks of stock pledge.”
However, China's government has sought to balance corporate debt deleveraging with increased access to finance for companies by demanding state entities invest in stocks, creating a shift in the marketplace that companies to which companies – including seafood firms – are still adapting.
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