New | Fitch warns on China bank connections to leveraged stock bets
Margin loans, or loans from securities or trust firms to investors used to buy stocks, have doubled on the mainland exchanges since the start of the year as Hong Kong and Shanghai shares hit 7-year highs
Fitch Ratings on Wednesday called out the growing risk at Chinese banks associated with lending into the margin trading business on the Shanghai stock exchange.
The warning was the second in two weeks from a ratings agency to highlight the indirect risk tying banks to the performance of China’s stock market, which has doubled in value since mid-2014.
Margin loans, or loans from securities or trust firms to investors used to buy stocks, have doubled on the mainland exchanges since the start of the year, hitting 1.9 trillion yuan at the close of last week, or 3.1 per cent of the total market capitalisation of China’s stock exchanges.
Credit Suisse this month put the figure for borrowed funds invested in the stock exchange at an estimated 4.4 trillion yuan to 5.9 trillion yuan, or between 6 and 9 per cent of the total capitalisation.
Data on bank exposure is lacking but many of those leveraged bets on stocks originate as loans from banks to securities or trust firms, forming an indirect connection between the stock market and credit quality at the lenders.
A plunge in stock prices could hurt the borrowers’ ability to repay loans while also wiping out the collateral backing the loans.
Fitch pointed out that securities firms have been allowed to use margin loan beneficiary rights as the underlying collateral for the bank loans. That means that the value of the collateral against the loans used to buy stocks relied on the continued performance of the stock exchange and could be erased by a market crash.