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Monday June 12, 2017

Stock Indices (Friday)

Shanghai Composite Index

Shanghai B

Shenzhen Component Index

Shenzhen B

Last 324.96 Open 323.29 High 325.51 Low 323.05 Change 0.44%

Last 10,177.45 Open 10,147.02 High 10,182.61 Low 10,124.94 Change 0.28%

Last 1,110.60 Open 1,110.17 High 1,111.25 Low 1,106.50 Change 0.11%

Last 3,158.40 Open 3,147.45 High 3,165.92 Low 3,146.11 Change 0.26%

Chinese RMB

100 Hong Kong dollars 87.17100 U.S. dollars 679.71 100 Japanese yen 6.1853 100 Euros 760.84 100 British pounds 867.04100 Swiss francs 701.78 100 Canadian dollars 502.95 100 Australian dollars 511.99 100 Singapore dollars 491.69

Hong Kong dollar 7.7966 Japanese yen 110.33 Euro 0.8933 British pound 0.7850 Swiss franc 0.9687Canadian dollar 1.3468Australian dollar 1.3292 Singapore dollar 1.3835

U.S. dollar

Exchange Rates (Friday)

MAINLAND money has helped Hong Kong stocks power to near two-year highs just when mainland markets appear to have stalled on slowing economic growth and policy tightening.

The divergence in fl ows via the “connect” programs between the two markets became prominent in recent months with the Hong Kong leg seeing much greater usage compared with mainland-bound traffi c.

“[Mainland] investors have been worried about economic growth, which possibly peaked in the fi rst quarter, and also tighter fi nancial regulations as the government stepped up deleveraging efforts,” said Yan Kaiwen, an analyst with China Fortune Securities.

Lopsided equity flows put the spotlight on the Central Government’s efforts to attract investments and the progress it is making in reforms that have promised to open up its capital markets. They also come at a time when the Cen-tral Government has imposed tighter restrictions on taking funds out of the mainland to staunch outflows.

From January to May, a total of 168 billion yuan (US$24.7 billion) fl owed into Hong Kong via the pipelines, while north-

bound usage in the same period was 86 billion yuan.

The southbound leg of the Shanghai-Hong Kong connect dominated, recording a net fl ow of 133 billion yuan in the fi rst fi ve months of the year, up nearly 80 percent from the same period in 2016.

The benchmark Hang Seng Index, meanwhile, has jumped about 18 percent since the start of the year, in stark contrast to a gain of about 1.8 percent in the Shanghai Composite Index.

Analysts say demand for Hong Kong shares will likely continue as mainland markets come under greater regulatory scrutiny from a crackdown on risky lending practices and as the authorities tighten credit to ward off debt bubbles.

Mainland investors are also increasingly seeking companies with better valuations and the opportunity to diversify into non-yuan assets.

“Hong Kong stocks are favored for their lower valua-tions and higher dividend pay-ments compared with mainland peers, as institutional investors who emphasize fundamentals and valuations participate more in the southbound legs,” said Linus Yip, Hong Kong-based chief strategist at First Shanghai Securities.

(SD-Agencies)

Mainland investors fl ood into HK stocks

A SHARP drop in mainly small-cap stock prices in China has exposed a new and potentially destabilizing pocket of lever-age in the world’s second-larg-est economy.

The value of shares that share-holders have pledged as collat-eral to borrow money, mainly from brokerages, has quadrupled over two years to more than 6 trillion yuan (US$898 billion), or a 10th of the total value of China’s stock market, accord-ing to estimates from Bank of America Merrill Lynch and BOCOM International.

For small-caps and start-ups, the proportion of pledged shares is higher, making up almost a fi fth of companies’ com-bined market value — or nearly US$400 billion as of end-2016. Across the rest of China’s stock markets, stock-collateralized loans account for 7.3 percent of total share value.

These loans were taken out when share prices were strong, with shareholders borrowing against their shares and using the proceeds for everything from buying shares to repaying loans and investing in other compa-nies, and sometimes luxury properties, analysts say.

But investor interest in small-caps has waned this year, with the ChiNext startup market down more than 8 percent and Shenzhen’s predominantly small-cap SME board down

more than 5 percent. In contrast, the blue-chip CSI300 index is up nearly 8 percent.

That has left a growing number of borrowers scrambling to avoid forced liquidation, where brokers make them sell the shares they have used as collateral.

Dongguan Kingsun Optoelec-tronic, which makes LED lighting products, and textile producer Dohia Group, for example, were among more than 100 companies fl agging problems with stock-col-lateralized loans. They suspended trading in their shares in April and June, respectively, citing margin calls being triggered after their share prices slumped.

If markets continue to slide, there could be a surge in margin calls on these loans, potentially triggering a vicious cycle of share selling, increasing the risk of broader fi nancial instability, analysts warn.

“If stock prices fall, but share-holders don’t have enough capital to replenish their collateral, the pledged shares would face forced selling,” said Meng Shen, director of Chanson & Co., a Beijing-based boutique investment bank.

“That would develop into a negative spiral. As the more you sell, the lower the stock price, which would then trigger more forced selling.”

China has a broader issue with collateral that could endanger the health of its fi nancial system — fraudulent or “ghost” collateral,

where pledged products either don’t exist or are already sold or pledged to multiple lenders.

Bank of America Merrill Lynch strategist David Cui warned that a potential “vicious selling circle” could lead to a replay of China’s mid-2015 market crash.

“As the 2015 experience shows, with high leverage, a vicious sell-ing circle can quickly develop,” he said, noting a “moderate” risk of broad-based fi nancial instability.

The stock market crash nearly two years ago, when the Shanghai stock index lost 40 percent of its value in three months, was fuelled largely by an unwinding of margin fi nancing for stock purchases.

Last month, as the ChiNext fell to near 2-1/2-year lows, more than 140 mostly smaller listed companies announced their shareholders had pledged additional shares to shore up the value of their loan collateral. That compares with 60 such cases in April, and fewer than 40 in January-March.

Dongguan Kingsun Opto-electronic said its shares were suspended after controlling shareholders Li Xuliang and his sister Li Shuxian faced margin calls. They had already resolved the issue — raising fresh money from investors to deposit with lenders — so didn’t need to sell the stock. Still, share trad-ing remains suspended as the company plans to divest some assets. (SD-Agencies)

Stock-collateralized loans under stress as shares slide

SHENZHEN Metro Group has acquired more shares in China Vanke for 29.2 billion yuan (US$4.3 billion), making it the largest shareholder of the developer, surpassing fi nancial conglomerate Baoneng Group.

The latest move by the State-owned subway operator will affi rm its control over Vanke, China’s second-largest prop-erty developer, and essentially ends the struggle for board-room control.

Shenzhen Metro has acquired 1.55 billion A shares in Vanke, equivalent to around a 14 per-

cent stake, from another devel-oper China Evergrande Group’s Hengda Real Estate and its sub-sidiaries at 18.80 yuan a share, Evergrande said late Friday.

That brings Shenzhen Met-ro’s stake in Vanke to 29.38 percent, making it Hong Kong and Shenzhen-listed Vanke’s biggest shareholder.

Evergrande, which last year leapfrogged Vanke to become China’s largest property developer by revenue, said in a Hong Kong stock exchange fi ling it would record a loss of some 7 billion yuan in the latest

deal. Evergrande said proceeds from the stake sale will mainly go toward debt reduction. The company’s leverage has surged in recent years, ending 2016 at US$78 billion.

“The stake purchase will take advantage of Shenzhen Metro and Vanke’s strengths in transporta-tion and property development services,” Shenzhen Metro said in a statement on its website.

Vanke still has to hold a board meeting to elect new members, as the term of the current ones has offi cially expired in late March. (SD-Agencies)

Shenzhen Metro now Vanke’s largest shareholder

An advertisement of China Vanke Co. at a Shenzhen Metro station in Shenzhen in this file photo. Shenzhen Metro Group has acquired more shares in China Vanke for 29.2 billion yuan (US$4.3 billion), making it the largest shareholder of the developer. Xinhua