China’s stocks fall to 4-year low amid fears of forced selling
Benchmark gauge closes at lowest since November 2014 as fears grow that shares pledged as collateral will face forced sales, fuelling further losses
China’s stocks fell to an almost four-year low as fears grew that shares pledged as collateral for loans will face forced sales, fuelling further declines in the world’s worst-performing market of 2018.
The unrelenting turmoil in the mainland market has produced a potential trigger for a fresh sell-off, by creating risk for many small companies that have pledged their stocks as collateral for loans in their hunger to fund expansion.
The pledged shares will get liquidated and further drag down the market as they approach critical levels, unless borrowers add collateral to cover the declining value or repay the loans.
The share prices of 666 listed companies have dropped close to the levels that will trigger forced sales, according to data from Tianfeng Securities.
It’s a vicious cycle: share drops lead to liquidation and liquidation leads to further share drops
The pledged shares are valued at 4.5 trillion yuan (US$650.1 billion), according to data from Essence Securities. That is almost twice as large as Hong Kong’s entire economy, which stood at US$341.5 billion last year.