Chinese Brokerages Want to Bundle Margin Debt into Bonds

Updated on

China’s first asset-backed security tied to stock margin loans is raising concern that authorities are fueling new risks as they attempt to reverse an equities slump.

Guotai Junan Securities Co., the nation’s second-biggest listed brokerage, plans to sell 500 million yuan ($80.5 million) of bonds Friday backed by margin facilities it extended to stock investors, according to a company statement. The offering comes after a stock rout last month that prompted regulators to allow brokerages to securitize margin loans.

China is increasingly opening to ABS, having reversed course in 2012 to allow sales regulators had banned in 2009 after the products helped spark the global financial crisis. Investor concern has mounted that unintended risks could spread after unprecedented state intervention to help staunch the stock slide that wiped out as much as $4 trillion.

“The risk could be that brokers may not be able to execute forced liquidations in case of sharp declines in the overall stock market,” said Shujin Chen, a banking analyst at DBS Vickers Hong Kong Ltd. “Liquidity risk can also be a problem if there are too many stocks that suspend trading, as happened in July.”

Securities firms in China raised more than $32 billion selling bonds in the second quarter, using the proceeds to help fuel a stunning 468 percent rise in margin lending in the 12 months to June 15, when stocks began to nosedive. The outstanding balance of margin debt on the Shanghai Stock Exchange was 839.8 billion yuan on Thursday.

Margin Traders

Guotai Junan’s notes will be China’s first ABS backed by margin debt, according to Aaron Lei, an analyst at Taiwan Ratings Corp., a Standard & Poor’s affiliate.

Its offering consists of a primary tranche, rated AAA, of 475 million yuan, and a subordinated tranche of 25 million yuan, according to the statement.

“We’re going to see more brokerages issue similar ABS products” after the China Securities Regulatory Commission allowed margin financing to be used as collateral, Chen at DBS Vickers said.

Huatai Securities Co. will also sell 500 million yuan of securities backed by margin debt Friday, according to a statement from the brokerage.

“So far we don’t know how the brokerages are going to use the proceeds,” said Gao Qunshan, an analyst at Tianfeng Securities Co. “It can be positive if they are using the funds to develop new businesses but negative for China’s financial market if they keep lending out for margin financing.”