Second Local Authority Mulls Rescue Plan for Listed Firms

A second Chinese local authority is preparing capital support to bail out listed local companies that are forced to liquidate shares amid this year’s stock market slide, Caixin learned from sources familiar with the matter.

The government of Shunde, a manufacturing hub in Guangdong province dominated by private home-appliance makers, is studying a plan to set up special government funds to provide loans and equity investments in local listed companies to ease liquidity crunches, sources said.

Shunde, with a population of 2.5 million, is one of the most affluent counties in Guangdong, under the administration of Fosun city. The district is home to 15 companies listed in the country’s A-share market, according to data from Hithink Flush Information Network Co.

The move came as China’s stock markets suffer a sell-off amid concerns over the trade war with the United States and slowing economic growth. The benchmark Shanghai Composite Index has dropped more than 22% so far this year, while the smaller, tech-heavy Shenzhen Component Index lost more than 30%.

Listed companies are increasingly dumping shares to repay share-backed loans amid the market downturn. As the value declines for stocks pledged to secure credit, borrowers face margin calls, or pressure to either pony up cash or sell shares. According to long-established economic theory, sell-offs driven by margin calls tend to further drive down share prices.

Private businesses have had a hard time amid the central government’s years-long campaign to reduce financial leverage, which made it more difficult for them to borrow. So far this year, more than 20 private companies have sold majority stakes to state-backed investors under pressure, sparking concerns over further erosion of the private sector.

Shunde is the second local authority reported to consider a government-backed rescue plan for listed companies. Caixin learned that the municipal government of Shenzhen, also in Guangdong, is planning to inject at least 15 billion yuan ($2.2 billion) through government-owned investment platforms into nearly 30 local listed companies to defuse the risk of share dumping.

A draft plan seen by Caixin showed that the Shunde government is planning separate funds in partnerships with banks and private capital to provide loans or equity investments to selected companies. But the plan is still in a preliminary stage without confirmed details about the amount of funding and methods of implementation, according to a district government official.

“The district government has noticed share-pledge risks and hope to help listed companies to reduce such risks,” said one source close to the matter. Several officials in the Shunde government confirmed the plan to Caixin.

The district government official said a team led by Vice District Governor Cai Wei and the heads of several local government agencies discussed the plan Monday. An executive of a listed company in Shunde said government officials consulted with him over the matter last week.

“Private companies have been under pressure of financial deleveraging and rising material costs this year,” the executive said. “If (the rescue) plan can been implemented, it will help a lot in solving the share-pledge risks”

Another source said he expected the Shunde rescue plan to cover not only listed companies but also a broader range of local businesses.

The Shunde government said in the draft plan it will not seek control through equity investments in listed companies and will set agreements with the companies on scheduled exits.

It is unclear whether the approach will be adopted by more local governments.

“It depends on local governments’ financial capacity,” said an executive of a Shenzhen-based listed company. “Many authorities are feeling the pinch themselves.”　

Contact reporter Han Wei (weiha@caixin.com)