MORE than 5 trillion yuan (US$770 billion) in shares, or about 12 percent of the country’s market capitalization, have been pledged as collateral for loans, according to data compiled by China Securities Co.

The pledges, popular among company founders and other major shareholders in need of cash, have become a growing source of concern for analysts and the government after the Shanghai Composite Index last week tumbled to within a few points of its first bear market since the aftermath of the 2015 crash.

The worry is that pledged stocks will be liquidated, dragging down prices, if borrowers can’t meet demands for additional collateral.

While it was said that regulators had told brokerages last week to seek government approval before dumping large chunks of pledged stock, some analysts say the threat of forced sales will continue to hurt the market.

UBS Group AG estimates that about US$68 billion in shares have dropped to levels below the threshold for liquidation.

“It will remain one of the major overhangs for the stock market in the near term,” said Hao Hong, chief strategist at Bocom International Holdings Co.

Regulators have plenty of tools to reduce the odds of a cascading selloff. Last week’s instructions to brokerages may slow the pace of forced liquidations, while a widely expected cut to banks’ reserve requirements is one of many monetary policy options to boost market sentiment. Authorities have already put caps on the amount of shares that can be pledged in an effort to limit risks.

In some ways, the share pledges currently worrying analysts can be more problematic during market downturns than the margin debt that roiled shares in 2015.

Most of China’s margin traders take on relatively small debts and are unlikely to face financial ruin if their wagers sour. But shareholders who pledge their stakes for loans tend to do so on a much larger scale, often investing the funds back into their businesses or into other illiquid assets. That can make it difficult to top up collateral when share prices fall, especially for founders who have most of their wealth tied up in their companies. Gaining access to additional sources of financing has grown increasingly tough this year amid the country’s clampdown on shadow banks.

“China’s deleveraging drive will continue to make refinancing harder,” said Sean Hung, a senior analyst at Moody’s Investors Service in Hong Kong. “If a company’s major shareholder has pledged a large amount of shares for funding, it usually suggests the firm’s liquidity conditions are tight and the risks for stock-pledged lending defaults are also higher.”

At least 37 companies have flagged risks associated with pledging of their shares over the past month, according to stock exchange filings.

Shenzhen Dvision Co., a video communications company, said Tuesday that pledged stock amounting to 40 percent of its shares outstanding had dropped to a level that may trigger a forced sale.

Jiangsu Dewei Advanced Materials Co., which makes materials used in electric cables, said that a 33 percent stake in the company was at risk of liquidation.

Smaller companies are usually the most vulnerable to share pledge-related selloffs because their major stakeholders lack access to ready funding, according to Moody’s.

Changjiang & Jinggong Steel Building (Group) Co., which manufactures agricultural machinery, is among firms that SWS Research Ltd. says face such a risk. The company’s shares — 37 percent of which were put down as collateral for loans — have more than halved from their peak last year. Other at-risk companies include Yihua Lifestyle Technology Co., Suning Universal Co. and Sanxiang Impression Co. (SD-Agencies)