Via Investing In Chinese Stocks blog,
Back during the 2015 stock market bubble, many investors and companies pledged their shares for loans. Standards were low at the time. In addition to taking insanely overvalued shares as collateral, banks also loaned money against shares that the owner didn't have the right to sell. Here's a post I wrote nearly 3 years ago, back in July 2015, detailing what I thought was the craziest example: Is This Peak Insanity? Blanket Company With P/E of 6000 Pledges 30% of Shares As Collateral
A blanket company had a P/E of 5800 at the peak. Shares have plunged, but the P/E is still above 3000. Shares fell more than 60% from their peak. This week, they were limit down on Monday, halted for three days, and limit up on Friday.
Just in case you think the P/E ratio may be distorting things, the price-to-sales ratio is above 70. Debt-to-assets is 23 times. Price-to-book 159 times.
By itself, this is crazy enough to show how the bull market was an indiscriminate liquidity driven momentum trader market. But this is not the end of the story.
Reuters: China's companies at risk of stock-backed loan recalls
Chinese companies that borrowed money using shares as collateral may have to put up more assets or repay their debts, carrying the ripples from the stock market plunge into the wider economy.
A near 30 percent collapse in share prices has started to endanger some businesses using such financing, and the country's banking regulator said on Thursday it would let financial institutions renegotiate lending terms in these circumstances.
Bank and other loans backed by listed shares officially increased around 260 percent in May to 58.4 billion yuan ($9.4 billion) from a year earlier, representing about 4.8 percent of total social financing for the period.
"There is no doubt all the companies are facing a financing dilemma," said Zhang Jihong, board secretary at Hubei Landing Holding Co Ltd, a textile company that suspended its shares from trading on Tuesday - roughly half of all shares on mainland bourses are now suspended - after its stock fell 61 percent.
Hubei Landing has 29.9 percent of its shares pledged as collateral for a loan from a trust company.
The stock trading under the symbol of Hubei Landing is now called Gosun Holding after acquiring Gosun Technology in August 2015. Shares are at a new post-2015 low.
More importantly, the "financing dilemma" is back for many companies. Already, more than 10 companies have run into trouble this month. That may be far from the worst of it as 98 percent of A-shares companies have pledged shares. Some major shareholders have pledged 100 percent of their holdings, while other companies have more than 70 percent of outstanding shares pledged.
In fact, judging from recent years, this landmine of equity...