[SHANGHAI] Chinese companies that borrowed money using shares as collateral may have to put up more assets or repay their debts, carrying the ripples from the stock market plunge into the wider economy.
A near 30 per cent collapse in share prices has started to endanger some businesses using such financing, and the country's banking regulator said on Thursday it would let financial institutions renegotiate lending terms in these circumstances.
Bank and other loans backed by listed shares officially increased around 260 per cent in May to 58.4 billion yuan from a year earlier, representing about 4.8 per cent of total social financing for the period.
"There is no doubt all the companies are facing a financing dilemma," said Zhang Jihong, board secretary at Hubei Landing Holding Co Ltd, a textile company that suspended its shares from trading on Tuesday - roughly half of all shares on mainland bourses are now suspended - after its stock fell 61 per cent.
Hubei Landing has 29.9 per cent of its shares pledged as collateral for a loan from a trust company.
Around 20 per cent of the roughly 1,500 companies that have suspended trading pledged shares for loans in the last month, according to a Reuters calculation. The total number that have pledged shares is much higher. "It is too early to predict what influence the stock crash will have on the real economy," Mr Zhang said.
On Thursday, the China Banking Regulatory Commission announced additional proposals to support the market, including measures authorising banks to adjust the maturity of loans using stock as collateral.
Other measures included letting banks adjust the levels at which equity collateral must be sold, and supporting listed companies entering the market to buy back their own shares.
Bank of Communications Co Ltd plans to lend at 60 per cent of share value for stock buybacks by companies and their shareholders, three sources said.
BoCom could not be reached immediately for comment. "There is bleeding, but it won't hurt the system on the whole," said Yang Zhao, chief economist at Nomura Holdings Inc in Hong Kong. "I don't see systemic risk." Mr Yang estimated total equity financing at about 600 billion yuan.
The total value of pledged shares could be four times that amount. Huatai Securities in a research note last weekend said the value of equities offered as collateral reached 2.53 trillion yuan at end-June.
Official measures of equity finance rose in the first five months of 2015 to 4.2 per cent of new total social financing from 2.6 per cent in 2014, according to data from the People's Bank of China.
While pure equity finance isn't a large proportion of total lending, share pledges are often part of collateral packages taken by banks, according to lawyers, so reeling markets may have a wider impact on corporate finance.
"It could potentially be quite serious because if a company has to provide cash (to top up collateral), it will affect liquidity, and if it has to pledge more assets, that lessens your ability to borrow more money," said Jonathan Silver, a banking and finance partner at Norton Rose. "It will potentially limit their ability to expand," he added.
The current market loan to value ratio is typically 40 per cent, so for every 100 yuan of shares, a bank might lend 40 yuan. "Currently, because we give a discount of 20 to 30 per cent, we are in a safe place," said one banker from a top-10 listed Chinese lender.
But China's banks, which have already seen their margins eroded by repeated interest rate cuts and increasing competition from other lending institutions, face further pain from the possibility of defaults and regulator-enforced refinancing. "We are afraid to lend on share collateral now," said another loan officer from a top-10 listed Chinese bank. "We are still worried we won't get back our investment in such loans," she added.