Chinese stockholders borrowing money against some $720bn worth of shares threaten to exacerbate the equity market sell-off and drive up corporate defaults, if falling prices force the sale of the shares held as collateral.
Chinese corporations and some large individual shareholders commonly pledge shares to banks as collateral to secure funds for purposes ranging from working capital to debt refinancing. Some 90 per cent of companies listed in mainland China have some level of their shares pledged as collateral, according to industry estimates.
The value of shares pledged has expanded by more than Rmb200bn annually since 2014, according to S&P, taking the total to Rmb5tn ($720bn).
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