China Finance | Main contradictions in the current stock market
Original: Yin Zhongli
From WeChat official account: China Financial Magazine
Author | Yin Zhongli, Researcher of Institute of Finance, Chinese Academy of Social Sciences Rongsheng Development President and Chief Economist of the Research Institute
Article | China Finance, 2018, Issue 18
In the first eight months of this year, China's stock market continued to decline, with major stock indexes falling by about 20%. Although the speed and extent of the decline is not the largest in the history of China's stock market, the losses of investors are the largest. The chain reaction caused by the continuous decline of stock prices has made many major shareholders and institutional investors of listed companies lose their money.
The internal contradiction of the current stock market is that the scale of leverage funds is too large. The scale of leverage funds in the stock market is roughly the same as that three years ago, that is, before the sharp shock of the stock market in 2015. However, the external environment of the stock market is more pessimistic. Improper disposal will lead to systematic risks in the stock market, which is particularly alarming.
"The problem is not excessive investment, nor excessive speculation, but excessive debt", which is a classic saying spread in the financial market. Almost all financial market crises originate from excessive debt. The sharp oscillation of China's stock market occurred at the end of June 2015, the main reason is that the scale of leverage funds in the stock market has expanded too fast, and excessive leverage is likely to lead to the "domino effect" of the stock market.
From the perspective of 2018, there are about three types of leverage funds in the current stock market.
The first type of leveraged funds is the margin trading and securities lending of the exchange (referred to as "two financing"). In the first half of 2018, the "two financing" has been stable at 80 billion to 100 billion yuan. After the sharp fluctuation of the stock market, the "two financing" has a complete set of risk control systems, and the scale is relatively stable.
The second type of leverage fund is the pledge financing of shareholders of listed companies. Since 2014, stock pledge repurchase transactions have developed rapidly and become an important source of profits for securities companies. The pledge rate of stocks is generally about 50% (the pledge rate of the main board is high, and the pledge rate of the GEM is low). When the stock price fluctuation is not large, the risk of this business is small and the income is considerable. In 2014, the balance of pledge style repo transactions was about 2 trillion yuan, rapidly increased to 5 trillion yuan in 2015, and the balance at the end of 2017 was about 6 trillion yuan (this is the market value of pledged stocks).
At present, the risks of stock pledge repurchase transactions have begun to be exposed, and the number is gradually increasing. As of the end of June 2018, 3447 A-shares still had outstanding stock pledges, accounting for 86.2% of the number of A-shares. From the perspective of scale, calculated at the price on June 8, 2018, the pledged market value of the outstanding shares in A shares reached 5.95 trillion yuan, accounting for 9.9% of the total market value of A shares. Among them, the market value of on market pledge through securities firms was 3.08 trillion yuan (51.8%), and the market value of off market pledge was 2.87 trillion yuan (48.2%). Among them, 552.8 billion yuan touched the closing line, 418.9 billion yuan touched the warning line, and more than 900 billion yuan of equity pledges were involved.
The risk exposure of stock pledge repo transaction is directly related to the decline of stock price. From the beginning of 2017 to the end of August 2018, although there was no significant decline in major indexes during the period, the decline of stocks with small and medium-sized market capitalization was quite tragic. There were 1678 listed companies whose share prices fell by more than 40%, and the total market value at the end of the period was 7.9 trillion yuan. Assuming that these stocks handled the stock pledge repurchase transaction at the pledge rate of 50% at the beginning of 2017, we have reached the warning line of covering positions; If the position cannot be covered, there will be a risk that these stocks will be forced to close positions.
It is worth noting that after June 2018, the stock price showed signs of accelerating decline. The GEM index fell 7.9% in June, 2.8% in July, 8.1% in August, and 20% in three months. At the beginning of June, there were 734 stocks with a decline of more than 40% (the base period was at the beginning of 2017). The total market value of these stocks at the end of the period was 3.5 trillion yuan. In just over two months, the number of stocks with a decline of more than 40% increased by nearly 1000. This shows that all kinds of leveraged funds have accelerated their position explosion in the last two months, which has caused further decline in market prices, forming a vicious circle. The regulatory authorities gave window guidance to the securities companies to minimize the forced closing of pledged shares, which to some extent slowed the market impact caused by the strong closing, but the risk of stock price decline apparently shifted to the securities companies, and the market risk did not decrease.
The third type of leveraged funds is the trust or financial account existing in the shareholders of listed companies. Many of these leveraged funds enter the stock market through fixed increase of listed companies, and some enter the secondary market through trust through private funds.
Since 2014, investors have begun to use the hierarchical design of trust products for OTC capital allocation, and banks and others have provided priority funds. These funds enjoy fixed returns, while stock market investors provide inferior funds. If the ratio of priority and inferior funds is 1:1, it means that the investor's capital leverage is doubled; if the ratio of priority and inferior funds is 2:1, it means that the investor's capital leverage is doubled. In the market, the capital leverage involved in private placement is generally more than one time, and some have increased the capital leverage to more than three times.
These OTC funds are generally listed in the shareholders' list in the name of trust products. The number of such shareholders can be roughly calculated by counting the number of trusts in the shareholders' list of listed companies. From the public information of listed companies in 2017, as of the end of 2017, 1172 listed companies had trust accounts in their shareholder lists, accounting for 35% of the total number of listed companies.
The continuous sharp decline in share prices has led to a large explosion of leveraged funds participating in fixed increase. From 2015 to 2017, the total refinancing scale of listed companies was 4.18 trillion yuan, of which a large proportion of funds were involved in fixed increase through trust and leverage. According to conservative estimates, the scale of leverage funds should exceed 2 trillion yuan.
Assuming that the leverage ratio of these funds is 1:1, then, if the stock price falls by more than 40%, these funds will face the risk of position explosion. From the beginning of 2017 to the end of August 2018, there were 1678 stocks that fell more than 40%, and about 50% of the stocks that participated in fixed increase from 2014 to 2017. The data shows that nearly half of the stocks with a large decline have ever made a fixed increase, which means that a large decline in stock prices is closely related to the fixed increase behavior. With the sharp decline of the stock price, these funds participating in the fixed increase have been faced with the risk of exploding positions. If the stock price cannot rise, once the fund explodes, the decline of the stock price will be further exacerbated.
From the above analysis, we can see that the scale of leverage funds in the current stock market totals about 6 trillion yuan, which is basically equivalent to the scale of leverage funds before the sharp stock market oscillation in 2015. It can also be said that the leveraged funds after the sharp stock market oscillation did not learn a lesson, but made a comeback in a new "waistcoat". The reason is related to the loose environment of financial supervision. However, the current stock market environment is very different from that of three years ago, even worse than that of 2016. Financial deleveraging has become an important policy direction in China. Therefore, the financial supervision department has issued a series of policies, which have accelerated the exposure and spillover of leveraged capital risks.
First, the policy of reducing leverage of trust funds. The Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (hereinafter referred to as the New Regulations on Asset Management) was officially released on April 27, 2018. According to Article 20 of the New Regulations on Asset Management, there are four kinds of products that cannot be graded in shares: public offering products, open private equity products, and private equity products invested in a single investment object (if the investment proportion exceeds 50%, it will be deemed as a single product), Private placement products in which the proportion of standardized assets such as investment bonds and stocks exceeds 50%. According to the regulation, the OTC capital allocation once prevalent in the stock market will be unsustainable. Without new capital replenishment, the stock funds that do not conform to the New Regulations on Asset Management must gradually withdraw from the stock market. Such leveraged funds amount to trillions of yuan, and their withdrawal will exert great pressure on stock prices.
Second, equity pledge financing needs to be standardized again according to new regulations. On January 12, 2018, Shanghai and Shenzhen Stock Exchanges jointly with China Securities Depository and Clearing Corporation issued the Measures for Stock Pledge style Repurchase Transactions and Registration and Clearing Business (2018 Revision), which has been officially implemented since March 12, 2018. The new regulation sets a series of risk control indicators for stock pledge, and requires that businesses exceeding the risk control indicators be rectified within a limited time. For example, the pledge ratio of a single stock should not exceed 50%, and there are 140 listed companies whose shares exceed the requirement of this ratio, 34 of which exceed 70%. Under the pressure of the New Asset Management Regulations, these funds must be cashed out when they are due, and the total amount of funds that will face the risk of exposure will increase.
In view of the situation that the main contradiction of the current stock market is the exposure of leverage capital risk, the solution to the stock market crisis must be tailored to the case.
First of all, the financial supervision department should have a unified understanding of the scale of leverage funds in the stock market. According to the above analysis of the author, the scale of leverage funds in the current stock market is basically the same as that before the sharp stock market oscillation in 2015, which is a dangerous signal. Improper handling is not only very easy to cause the stock market crash, the second sharp stock market oscillation, but also easy to cause the risk of trusts, brokers and banks. On August 24, the Financial Stability Commission held its third meeting, which focused on the risk of stock pledge financing. It can be seen that this issue has attracted the attention of the decision-making layer, which has created good conditions for resolving the leverage fund risk in the stock market.
Secondly, from the operational perspective, we should not only prevent the increase of leverage funds in the stock market, but also prevent the use of simple and crude ways to clear the leverage funds in the stock market. The author suggests that in the process of implementing the New Regulations on Asset Management, the asset management products involving the stock market should be liquidated until the expiration of the product, and should not be liquidated in advance as far as possible.
Thirdly, according to the provisions of the New Regulations on Asset Management, at least more than 2 trillion yuan of funds will be withdrawn from the stock market in the next three years (these funds mainly exist in the form of hierarchical trust products). If there is no new capital supplement, it is difficult to complete the task. We can learn from the method of "saving" the stock market in 2015 and establish a large stabilization fund funded by the government to enter the market. The stabilization fund can be formed by proper regulation and transformation on the basis of government funds that have entered the market, and is managed by the Financial Stability Commission.
Finally, in order to ensure the basic balance and stability of capital in the stock market, appropriately reduce the speed and scale of new share issuance. The amount of capital raised by IPO is very small, but IPO requires a large amount of capital from the secondary market, especially for large companies. ■
Editor in charge: Gao Yanyun
