Chinese brokerages participating in a new central bank-led swap program will likely increase their holdings of domestic equities over the next 12 months. We view these investments as volatile and of a higher risk than fixed-income securities, potentially hitting brokerages' capital ratios.
What's Happening
The central bank has created a swap program to boost the country's stock market. The tool provides institutions with low-cost liquidity that can only be used to buy stocks. Institutions exchange high-risk securities for risk-free bonds. Entities pledge the bonds as collateral against loans, using the money to buy stocks.
Why It Matters
The swap program may lead to increased stock holdings by brokerages, eroding their ratio of capital to risk assets.
- By our estimation, stock holdings typically comprise 5%-15% of the total assets of the Chinese brokerages that we rate, without considering hedging effects.
- The Chinese renminbi (RMB) 500 billion swap program, if all invested by brokerages into stocks, could increase this ratio of share holdings to total assets by another four percentage points at the sector level. This is not negligible.
Moreover, the regulator will give brokerages special dispensation for the assets they hold through the program. The stock holdings from this program will not affect regulatory capital ratios very much, despite the addition of risk assets.
However, such holding may hit our risk-adjusted capital ratio assessment. The treatment would therefore widen the gap between the regulatory capital ratio and our risk-adjusted capital ratio.
We do not view this program as a fundamental change for sector liquidity. The program is a tool to facilitate an increase in stock holdings by securities companies; it is not a tool to provide emergency liquidity.
Chart 1
What Comes Next
Much will depend on the extent to which brokerages tap the swap program. We expect firms' willingness to participate in the swap, and the pace of their investment, will be mostly commercially driven, and will depend on their investment strategies. The take-up will depend on market conditions. Companies with strong risk discipline will participate more cautiously, according to their risk tolerance.
The central bank may expand the program. That decision will depend on the effectiveness of the current round, market behavior and associated risks. Approval and implementation have so far been swift, indicating that authorities are keen to jump-start the stock market.
Background In Brief
The central bank stipulates that only securities firms, fund managers and insurance companies can participate in the swap, within a quota.
The program has an initial size of RMB500 billion. As of last Thursday, the sector regulator approved 17 brokerages and three fund managers for the plan, with a total swap quota of RMB200 billion.
Editor: Jasper Moiseiwitsch
This report does not constitute a rating action.
| Primary Credit Analyst: | Xi Cheng, Shanghai + 852 2533 3582; xi.cheng@spglobal.com |
| Secondary Contacts: | Yiran Zhong, Hong Kong 25333582; yiran.zhong@spglobal.com |
| Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com |
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