SHANGHAI, June 26 (Reuters) - China’s two largest stock exchanges said in notices posted on Tuesday that risks to the market from share-backed loans can be controlled, seeking to reassure investors worried by turbulence from global trade tensions.
Loans made on the strength of the value of shares pledged are common globally, but can cause fire sales if such shares drop sharply as lenders sell-up to recoup their loan or else demand more collateral.
Shanghai stocks tumbled nearly 4 percent to a two-year low earlier this month, while the yuan fell to a more-than-five-month low against the dollar as Washington’s fresh tariff threats against China raised the spectre of a full-blown trade war.
The Shanghai stock exchange, China’s largest, said that the scale of share-backed loans is gradually falling and the total market value of stock pledges accounts for 3 percent of the total value of the exchange.
The second-largest Shenzhen stock exchange followed suit, saying that the risks from share-backed lending are controllable.
Financiers who have lent against shares are unlikely to liquidate immediately, but are more likely to negotiate with the troubled party and ask for new security, the Shanghai stock exchange said.
A small number of listed company shareholders have not sufficiently assessed their own capital strength and will not have the capacity to cover their positions. Such contracts will be extended and additional guarantees will be given, the Shenzhen exchange said.
Reporting by Engen Tham and Samuel Shen; Editing by Eric Meijer