Uncertainty Over Trust Fund Leverage Policy Remains After A-Share Indexes Slump
Liao Shumin
DATE:  Feb 02 2018
/ SOURCE:  Yicai
Uncertainty Over Trust Fund Leverage Policy Remains After A-Share Indexes Slump Uncertainty Over Trust Fund Leverage Policy Remains After A-Share Indexes Slump

(Yicai Global) Feb. 2 -- Three major A-share indexes slumped yesterday, with more than 2,900 stocks falling and over 220 of them plunging by their daily limit. Some speculators have put the blame on policy updates requiring a reduction in the leverage ratio of trust funds, but whether such a change is coming remains unclear.

Most of the companies whose stocks dove by the daily limit have trust firms as major shareholders. Several companies have not received documents about a policy adjustment, the 21st Century Business Herald quoted securities and trust sector insiders as saying.

Rumors that the government would require trust funds to lower their leverage ratios from 2:1 to 1:1 have been circulating. However, people working in the field painted a somewhat different picture.

If investment in a single stock accounts for no more than 20 percent of total investments, companies may still register products with a leverage ratio of 2:1 with local banking regulators, an employee from a trust company in Northwest China said. Local authorities give priority to products with a ratio of 1:1 when issuing approvals, a trust manager in East China said.

Several factors caused the stocks that plummeted to do so, a deputy head of a trust company in charge of securities business said, adding that corrections are necessary as the broader market and blue chips have accumulated gains, the government has introduced restrictions for trust plans and banks' wealth management and asset management programs, and many high-leverage products issued last year have expired.

"Products with a leverage ratio of 2:1 issued last year have expired, but no new structured products are available, forcing companies to sell shares," he said. "Some structured products with a ratio of 2:1 cannot be renewed as regulators have explicitly required that leverage be reduced. Some firms' compliance departments do not approve high-leverage products. Eight companies offered products with a leverage ratio of 2:1, but now only one or two are selling such products."

China Fortune International Trust Co. issued an internal document earlier this year to further regulate its securities investment business, requiring that mezzanine structured securities investment business be suspended. Banking regulators in Beijing and Shanghai have also offered window guidance for trust companies since Jan. 11, instructing them to regulate their operations and halt mezzanine structured securities investment business.

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Keywords:   A-Share,Deleveraging,Trust Fund