China Stock Market Crash: Half of Companies Halt Trading

Stock market crashMore than half of all publicly listed companies in China have filed for trading suspension in order to save themselves from the stock market crash.

On Wednesday July 8th, the Shanghai Composite Index plunged 5.9%, while the Shenzhen Composite dropped 2.9%. Close to 1,000 stocks fell by the 10% daily limit posed by regulators. Since June 12th, the Shanghai Composite has fallen a staggering 32%.

More and more companies are joining the trading halt club. By July 8th, more than 1,400 companies have filed for trading suspension, representing more than 50% of all public listed companies.

Some retail investors said that they would prefer the companies to stop trading, because it could prevent their stock prices from any further drops. However, with half of the stock market in suspension, the other half has to bear all the risk.

The problem is that a lot of investors in Chinese securities investment funds want to redeem their investments. In order to meet the obligation, the funds need cash. This time around, cash on hand is not likely to be enough so the funds have to sell some of their holdings. With more than half of the public listed companies in trading suspension, funds could only reduce their holdings of companies that are still trading. This elevates the downward pressure on companies that remain actively traded.

The nation’s banks are another problem. Some companies have pledged their shares as collateral to obtain bank loans. As the stock market crashed, the value of these collaterals deteriorated dramatically. Some banks have required these shares to be liquidated, further increasing selloff risks.

The length and steepness of the stock market tumble has brought all kinds of measures from the regulators. On July 8th, China Securities Regulatory Commission (CSRC) banned major shareholders, directors, and corporate executives from selling shares of their public listed companies for six months. Investors with more than five percent of any company cannot reduce their stakes in the secondary market. According to the announcement, the ban comes from the recent “irrational declines” of the stock market, and is for the purpose of maintaining capital market stability. (Source: China Securities Regulatory Commission, July 8, 2015.)