China’s Supreme People’s Court, Supreme People’s Procuratorate, Ministry of Public Security, and CSRC on March 6 jointly published guidance on further regulating the courts to frozen pledged stocks of listed companies, effective from July 1, as reported by Caixin on March 7. This guideline provides a new solution for defrosting stocks pledged by debtors who have defaulted, which is allowing pledgees to sell those pledged stocks by self-deciding the price.

Previously, in the cases of preservation and execution, the only method to fulfil debtors’ obligations after defaults was the compulsory auction of stock collaterals by the courts. However, after the courts froze the pledged stocks, pledgees cannot change the selling prices amid the frequent fluctuations of the stock market. This might damage the rights and benefits of pledgees, debtors, and creditors of the lawsuit, if missed good opportunities and prices to sell the stocks.

Considering this, the new guidance aims to add a market-oriented solution and minimize the execution impact on the stock market. In the meantime, different than other assets, as the stocks of listed companies have trading prices on the secondary market, the courts can still conduct supervision over pledgees’ stock disposals. After assistance agencies mark those pledged stocks in the trading system, referring to the public market prices, the courts can prevent the collusion between debtors and pledgees to settle the stock at a low price, damaging the rights of creditors.

Prior to this, from the financial side, the Shanghai and Shenzhen Stock Exchange revised and enhanced requirements on stock pledging in 2018. After strengthened regulations, the pledged stock scale decreased for the first time at the end of 2019. As of February 5, the total market value of pledged stocks was RMB4.16tr, declining from the RMB4.32tr at the year-end 2020 and RMB4.58tr by the end of 2019.

Sources:

https://finance.caixin.com/2021-03-07/101671925.html

https://www.jwview.com/jingwei/html/02-18/381690.shtml

https://finance.sina.com.cn/stock/stockptd/2020-11-08/doc-iiznezxs0710622.shtml