FIRMS may be forced to sell at least US$12 billion in shares in coming weeks to meet margin calls, dealing a further blow to China’s stock market that have already seen some US$2 trillion in value wiped out so far this year.

    Some firms that had pledged shares as collateral for loans are now faced with a stark choice: dump them under pressure from impatient brokers and banks and book a loss, or stump up fresh cash or other assets to make up for the difference in value.

    If that wasn’t enough to dash hopes that China’s stock market will soon claw back from 14-month lows, fresh selling pressure is coming from mutual funds and hedge funds that are liquidating positions as shell-shocked investors race to withdraw what cash they have left.

    All that is leading to a vicious cycle where further share price drops are likely to trigger more margin calls and threaten further forced sales.

    “Over half of all listed companies in China have their shares pledged, so if the market falls further, this issue could become a systemic risk,” said David Dai, a Shanghai-based investor director at Nanhai Fund Management Co.

    Some analysts had already believed that the Shanghai Composite Index could fall another 6 percent to test the psychologically important 2,500-point level, where its stunning but eventually short-lived rally took off late last year.

    “If the market continues to fall, equity pledging-related selling pressure could increase significantly,” said Gao Ting, head of China strategy with UBS Securities.

    “When a position has to be closed for transactions using floating shares as collateral, the pledger sells on the secondary market, putting further pressure on the stock market.”

    On Thursday, trading in shares of Maoye Communication and Network Co. was halted after it said it received notice that its controlling shareholder faces margin calls, one of at least eight companies that have made similar announcements so far this year.

    In a stock exchange filing, it said it would announce measures soon to deal with the issue. The stock has lost 45 percent of its value in the last month.

    Given the 25 percent slide in shares within weeks, the total number of such companies in similar straits is likely to be much higher, but they do not have to report margin calls.

    According to UBS, over 1,350 Chinese listed companies have entered into transactions involving equity pledging since 2015. As of Tuesday, 155-to-214 stocks had hit position-closing levels, with pledged shares in question worth about 79 billion yuan to 85.7 billion yuan (US$12-13 billion).

    UBS estimates that pledged shares facing margin calls could triple if the market falls a further 10 percent.

    In the more transparent margin lending business at brokerages, where investors borrow money to buy stocks, the pressure is already obvious.

    As the market tumbles, outstanding margin loans have declined for 20 sessions in a row — the longest such streak on record — with over 100 billion yuan worth of leveraged bets have been unwound last month alone.

    But with such loans still at an estimated 913 billion yuan, there’s plenty of room for more deleveraging, and more downward pressure on markets, which could trigger fresh margin calls.

    “There’s obviously more room for deleveraging, but no one knows what is the appropriate level of leverage,” said Wang Yu, analyst at Pacific Securities.

    China’s securities regulator has tried to downplay margin risks this year, saying in January that risks from margin calls were controllable, and the market impact limited. But a flurry of reassurances from authorities in recent weeks has done little to calm the nation’s panicky investors. (SD-Agencies)