Over $10B Repurchase, Increase, and Lending Impact on Banks & Listed Firms

The first batch of stock repurchase and increase in holdings refinancing projects have been quickly implemented.

Recently, the four major state-owned banks, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank, as well as two large joint-stock banks, China Merchants Bank and CITIC Bank, announced the progress of the first batch of stock repurchase and increase in holdings refinancing business, with 23 listed companies and over ten billion yuan in loan fund business supported. At the same time, Ping An Bank and other institutions are also actively following up.

Experts interviewed pointed out that there is an essential difference between stock repurchase and increase in holdings refinancing and loan funds entering the stock market. The establishment of this stock repurchase and increase in holdings refinancing will bring greater challenges to the internal control management of banks. Listed companies should also comprehensively consider the purpose of repurchasing equity and debt-bearing capacity, and should not be "greedy". In the long run, the establishment of new tools will not have a significant impact on the stock market.

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The first batch of over ten billion yuan in loans has been implemented.

A few days ago, 23 listed companies on the Shanghai and Shenzhen stock exchanges, including Sinopec, China Merchants Shekou, and China Merchants Shipping, announced in a concentrated manner that the company or major shareholders will use bank-specific loan funds for stock repurchase or increase in holdings, involving a total loan fund of over ten billion yuan. The six banks participating in this loan project for the first time are Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China, China Merchants Bank, and CITIC Bank.

What is stock repurchase and increase in holdings refinancing? On October 18, the People's Bank of China, together with the State Financial Regulatory Administration and the China Securities Regulatory Commission, issued the "Notice on the Establishment of Stock Repurchase and Increase in Holdings Refinancing" (hereinafter referred to as the "Notice"), establishing stock repurchase and increase in holdings refinancing to encourage and guide financial institutions to provide loans to eligible listed companies and major shareholders to support their repurchase and increase in holdings of listed company stocks. It is reported that the first phase of the stock repurchase and increase in holdings refinancing quota is 300 billion yuan, with an annual interest rate of 1.75%, and a term of 1 year.

Zhou Maohua, a macro researcher at the financial market department of Everbright Bank, believes that the innovative implementation of this tool will help to leverage more equity investment funds and promote the benign development of the capital market and the real economy.

For this special loan project, banks responded quickly, taking only two days from the issuance of the establishment notice to the implementation of the first batch of projects. As early as the day the announcement was issued on October 18, the reporter learned from a person in a major bank that the head office of the bank had already been studying and formulating products.

"Recently, the bank has required the public line to market this refinancing product." Another major bank staff revealed. In addition, Ping An Bank, Shanghai Pudong Development Bank Ningbo Branch, and other institutions have also expressed in recent days that they have reached a cooperation intention for stock repurchase and increase in holdings refinancing with some companies. Some banks even stated that they have reached a cooperation intention with nearly a hundred listed companies.

Looking at the first batch of disclosed listed company names, the credit subjects selected by the banks this time include different ownership systems, involving the main board, STAR board, and ChiNext board. In addition, the market value of the companies is also mostly high, with a large proportion of companies with a market value of hundreds of billions and tens of billions."Stock buyback and shareholding increase special re-lending, as a policy tool for the central bank to support the stable development of the capital market, on the one hand, can help listed companies with relevant needs to carry out effective market value management within a compliant framework. On the other hand, it also helps to maintain the stable operation of the capital market, which is beneficial for supporting the growth of listed companies' performance and boosting market confidence," said Su Xiaorui, a senior researcher at Su Xi Zhi Yan.

The notice also poses higher requirements for bank risk control. The reporter noticed that in this notice, it is pointed out that the 21 national financial institutions including the China Development Bank, policy banks, state-owned commercial banks, China Post Savings Bank, and joint-stock commercial banks, which issue stock buyback and shareholding increase loans in accordance with the notice, are exempted from the execution of relevant regulatory provisions that do not conform to "credit funds shall not flow into the stock market" and other related regulatory provisions; credit funds outside the exemption shall implement the current regulatory provisions.

There are also concerns about the flow of funds in the market. In previous media reports, bank staff also expressed concerns about the flow of funds into the stock market.

Li Nan, an associate professor at the Shanghai Advanced Institute of Finance of Shanghai Jiao Tong University, believes that it is important to clarify the essential difference between "stock buyback and shareholding increase re-lending" and "loan into the stock market".

"Credit funds cannot enter the stock market is clearly stipulated in many bank regulatory documents such as the Commercial Bank Law and the General Rules of Lending. The essence is not that credit funds cannot have any contact with the stock market, but that credit funds cannot be used for speculative business in the stock market, futures market, and other markets. Buying and selling stocks is a high-risk speculative activity, which does not conform to the use of credit funds," Li Nan analyzed.

Li Nan believes that for shareholders of listed companies operating normally, the behavior of stabilizing stock prices by repurchasing stocks during a low stock market is not aimed at bottom fishing, but at showing confidence in the company to shareholders, which is a very reasonable economic behavior. Moreover, the original repurchase of shares by enterprises relies on bank loans. In the absence of "merger and acquisition loans" or "capital loan" from banks, it is easy to divert working capital loans. Banks should design corresponding credit products to support.

In addition, this notice also gives 21 financial institutions the right to independently decide whether to issue loans and reasonably determine loan conditions, while clearly requiring "risk bearing" and requiring loan funds to adhere to "special funds for special use, closed operation". This undoubtedly also poses higher requirements for the internal control management level of banks.

Zhou Maohua said in an interview that the essence of banks creating special loan tools is to promote the transformation of savings into investment, enhance the ability of financial support for the real economy, and promote economic recovery and the development of listed companies. Compared with ordinary enterprise loans, the important difference of stock buyback and shareholding increase re-lending is that the risk fluctuation in the equity market is relatively larger, and the requirements for risk control ability of bank financial institutions are relatively higher.

Faced with new businesses and models, what should banks and listed companies as credit subjects pay attention to?"Excessive stock buyback activities should be avoided, as they may lead to privatization; it is only necessary to demonstrate one's determination and confidence to the market," Li Nan suggests. For companies, he advises that they should consider the purpose of stock buybacks and their debt-bearing capacity comprehensively. Banks, on the other hand, should carefully distinguish the loan purposes of credit enterprises and examine their business strategies, observing whether the enterprises pursue long-term stable operations, engage in stock market speculation such as shareholder cashing out, and whether they can form a stable comprehensive repayment capacity in the future.

Li Nan believes that, in the long run, stock buybacks and increased loans will not have a significant impact on the stock market. "On one hand, regardless of the existence of re-lending products, it is a normal practice for listed companies to use bank loans for stock buybacks; the emergence of this product is actually beneficial for regulation. On the other hand, there will not be many enterprises that can maintain normal operations and good financial conditions during periods of stock market downturns, and spend money to repurchase stocks."