In Q2 2019, the stock pledged repo business of SZSE and SSE continued to scale down, bailout coverage was further expanded and risk from closing positions was controllable, but the credit risk of some listed companies’ controlling shareholders needed further mitigation. To strengthen risk monitoring, research and judgment, we have summed up the characteristics of the stock pledged repo risk of SZSE and SSE in Q2 and put forward relevant thoughts on further defusing the risk with relevant parties.
I. Risk from closing positions was controllable, but the credit risk of some controlling shareholders needed to be further mitigated
In Q2, stock indexes fluctuated within a certain range due to various factors, but stock pledge risk continued to be mitigated on the whole, following the trend in the previous year.
First, business continued to scale down, and the proportion of the closed amount was low. At the end of Q2, the outstanding financing through stock pledged repo on Shenzhen and Shanghai stock markets stood at CNY1.0694 trillion, down 5.0% from the end of Q1, continuing the downward trend since February 2018. The total market value of the pledged stocks of the stock pledged repo markets in Shenzhen and Shanghai was CNY2.1 trillion, accounting for 3.9% of the entire A-share market capitalization, down 0.6 percentage point from the end of Q1 and down 2.3 percentage points from the peak value at the end of 2017. In Q2, a total of CNY5.2 billion was sold for default disposal on Shenzhen and Shanghai stock markets through the secondary market, a daily average of CNY90 million, slightly down from Q1, accounting for about one ten-thousandth of the daily average turnover of the two stock markets. Closing positions for default disposal had minimal impact on market prices.
Second, greater efforts are needed to defuse the risks that are concentrated on some listed companies’ controlling shareholders. At the end of Q2, the controlling shareholders of 206 listed companies were faced with default as their stock pledged repos were lower than the agreed performance guarantee level. Except for those who reached an agreement for extension and supplementing the pledges, there were controlling shareholders of 154 listed companies declared by securities companies as defaulting parties and were to be disposed of accordingly or with pledged stocks frozen by the court. Relevant measures were taken against 85% of those shareholders by the end of 2018, an indication that pledge risk was relatively concentrated. In the first half of the year, the stock prices of the foregoing 154 listed companies fell 4.3% in average, obviously deviating from the rising trend of main stock indexes on the market. The market rally didn’t reduce their default risk. After defaulting on some stock pledged repos last year, 31 of those controlling shareholders committed breaches again this year, with a default amount increasing from CNY4.5 billion at the end of last year to CNY15.1 billion this year. In the meantime, 108 listed companies had risks or problems such as significant declines in performance, debt risk, fund occupation and guarantee violations, with their operational risk intertwined with the credit risk of their controlling shareholders.
Third, bailout coverage was further expanded, but the depth needs to be expanded. According to the data submitted by securities companies to SZSE and SSE, the bailout projects completed by the end of Q2 involve 224 listed companies and about CNY 86.1 billion, up 76 (51.4%) and CNY27.7 billion (47.4%) from the end of Q1, respectively. 86.2% of the bailout recipients are controlling shareholders of listed companies, and 81.7% are private enterprises. In terms of bailout method, equity methods such as transfer of shareholders’ shares and creditor’s right methods such as pledge financing account for 49.8% and 49.9% respectively. Among the defaults involving controlling shareholders of listed companies in Q2 that were reported by securities companies to SZSE and SSE, one fifth of the default amount came from the default of shareholders in other debts after they accepted bailouts for partial debts, indicating that their pledge risk was not fully addressed with bailouts and that the bailouts need to go further.
II. All parties should work together to defuse the stock pledge credit risk of controlling shareholders
The key to forestall and defuse stock pledge risk is to defuse the credit risk of some listed companies’ controlling shareholders. Relevant parties should fulfill duties conscientiously, implement measures comprehensively and play a greater role. First, shareholders should respect the market and identify and handle risks as early as possible. As mentioned above, it is a complex and long-term process to forestall and defuse stock pledge risk. However, some controlling shareholders miss the opportunity to defuse the risk because they don’t fully understand the characteristics and transmission mechanism of stock pledge risk or pay enough attention to the problems. Controlling shareholders should hold an open and cooperative attitude, actively make due bail-in efforts and take the initiative in risk defusing. Second, securities companies should give play to their comprehensive advantages and combine shareholder bailouts with the improvement of the quality of listed companies. Securities companies, as important intermediary agents in the capital market, can play a greater role in serving the real economy, forestalling and defusing risks, and improving the quality of listed companies. When a listed company’s controlling shareholder has pledge default and the listed company is in operating difficulty, securities companies may provide package services such as M&A and asset injection for the listed company while bail outing the controlling shareholder, to defuse the risks of the controlling shareholder and the listed company through resource integration and industry upgrading.
Various institutions participating in bailouts should further increase efforts, strengthen cooperation with local governments while sticking to the principles of market-based operations and rule of law, improve internal incentive and constraint regulations, due diligence and discharge systems, etc., combine fund investment with industry support, promote risk defusing through product innovation, and provide support for the risk defusing of listed companies or their controlling shareholders.