China brokerages repackage margin loans into exchange-traded securities
Huatai Securities is selling 500 million yuan of the country's first asset-based securities product built on margin-financing loans as underlying assets.
The product is due to be listed and sold to investors through the Shanghai Stock Exchange.
The minimum investment for the product is 100,000 yuan, with exposure of a single borrower capped at 5 per cent. Investors will bear the risks for gains and losses in the underlying portfolio.
Approval to mainland brokerages to securitise margin loans was given by the China Securities Regulatory Commission on July 1. Brokerages have been encouraged to raise capital via securitisation to help them recapitalise.
Margin finance, or money borrowed to buy stocks, largely fuelled the mainland stock rally, before it unravelled in mid June.
The new issue comes on the heels of Huatai Securities' recent listing in May that attracted HK$38.8 billion of capital.
Before the brokerages were approved for asset-backed securities, they would pass the margin loans to banks.
"There is no clear disclosure as to how much margin loans banks have bought on to their balance sheets. These will be broadly classified as sums under interbank relationships - held for the purpose of liquidity management," said Patricia Cheng, the head of China financial research at CLSA.
According to Moody's, total outstanding margin loans stand at about 1.31 trillion yuan.
"Regulators are eager to support the market with new policy measures. There has been a loosening of risk controls in this business," said David Yin, an assistant vice-president at Moody's.
Zhu Haibin, chief China economist at JP Morgan, said: "Do margin loans constitute a systemic risk? This is subject to debate. It is not a huge figure in the context of total social financing. But people said the same about subprime loans in the US."
Asset-backed securities in China has so far been built on more familiar and stable assets such as rental income, car loans and credit card repayments. Margin loans, in contrast, are more esoteric and volatile.
If customers fail to repay margin loans, the value considered to compute the underlying assets will be the equities the brokerages force-liquidate.
China suspends A-share ETF option trading for four hours
Trading of the option tracking the A50 ETF was unexpectedly suspended for four hours on Friday, triggering concern that Beijing was intervening in the market again.
But market watchers said the suspension could have purely been a technical matter rather than an administrative order from Beijing.
"The reason for suspension was technical. Such suspensions are rare in the China market but I think the market should not read too much into the incident. Options trading is new in China's A-share market and even in mature markets like the United States, options trading can halt due to technical reasons," said Zhou Jianhua, a Shanghai-based market strategist at Central China Securities.
Trading of the option was suspended between 9.56am and 2pm, its first halt since it was launched in February.
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. The China A50 ETF option is the first of its kind tracking an onshore China index and deemed a key tool to widen the hedging choice for investors and deepen market liquidity.
"China's margin financing scale is estimated at around 1.39 trillion yuan, sharply down from the peak of 2.3 trillion yuan seen in June … the time and the need for the government to use extreme steps to rescue the market has passed," said Zhou.