Expert Analysis | Utilizing Stock Repurchase and Increase Financing for Specialized Revolving Loans to Cement Market Health Development
Special Commentator, Xiong Jinqiu
On September 24th, the People's Bank of China Governor, Pan Gongsheng, announced that a specialized revolving loan program for stock repurchase and increase financing would be established. This initiative aims to guide commercial banks to provide loans to listed companies and major shareholders, supporting the repurchase and increase of stocks. The People's Bank will issue specialized revolving loans to commercial banks, with a support ratio of 1.75% service revolving interest rate, and commercial banks may add 0.5 percentage points when lending to clients, resulting in a total interest rate of 2.25%. The initial scale is set at RMB 3 trillion.
The People's Bank aims to guide commercial banks to provide loans, which will support the repurchase and increase of stocks by listed companies. However, from a commercial perspective, the core goal of bank lending remains profitability. Banks need to consider whether the loan can be repaid on time with principal and interest, and thus have the right to independently decide whether to issue loans and in what amount based on their own circumstances, the creditworthiness of borrowers, and repayment capabilities. Banks must ensure the security of loans and prevent related risks, avoiding losses. All operations should follow market principles.
After a listed company repurchases stocks, if it resells them quickly in the market, this is essentially equivalent to making a profit from speculation, which is not encouraged. On the contrary, if the repurchase is intended for cancellation, it benefits all parties. To prevent loan recovery risks, banks can require borrowers to submit collateral. For stock repurchase and increase financing, listed companies can provide bonds or other liquid assets as collateral.
However, after repurchasing stocks and canceling them, the collateral does not exist anymore, and stock prices may fluctuate rapidly in either direction. In the past, there have been cases where stock pledges for loans led to explosive and stabilizing situations. Therefore, it is best for listed companies that repurchase stocks to provide bonds or other liquid assets with strong market liquidity as collateral. The loan amount should be only a part of the total repurchase value, and repurchasing stocks requires listed companies to have some asset strength and profitability. Simply relying on loans may not achieve this.
Additionally, banks need to control loan risks by considering the compliance operations of listed companies and their major shareholders. Some listed companies have numerous issues with corporate governance, while some major shareholders engage in illegal or irregular activities. Banks dealing with these entities should be vigilant. For companies that have implemented delisting warning signals, their stocks may suddenly delist, and banks should also prevent loan risks. The loan business should focus on the constituent stocks of indexes such as the Shanghai Stock Exchange 300.
Due to the specialized revolving loan interest rate being 2.25%, some argue that only listed companies with dividend yields above 2.25% will have the incentive to finance repurchases. However, listed companies do not necessarily need to consider their own stock dividends when repurchasing stocks. As long as the repurchase price is below the intrinsic value, the repurchase behavior is reasonable, and theoretically, it can further enhance the company's stock value. As long as a listed company's stocks have repurchase value, even if the dividend yield is low, they can still consider financing repurchases. After all, some listed companies are in high-growth stages with lower dividend ratios.
Of course, listed companies with higher dividend yields can strengthen their cash flow and improve their ability to repay loans on time. Banks may assess a company's profitability and dividend yield when issuing loans but should also evaluate the company's intrinsic value. If the stock price is significantly above its intrinsic value, it is advisable to exercise caution in issuing loans, as loan risks are mainly triggered by stock market bubbles bursting.
The "Provisions on Loans" of the People's Bank of China stipulates that borrowers shall not use loans for capital-gains-oriented investments. In 2015, the "Guidelines on Risk Management of Commercial Banks' Mergers and Acquisitions" proposed that banks can actively and prudently conduct merger and acquisition financing business based on laws and regulations. Given the current policy environment, how to implement repurchase and increase financing loans requires issuing implementing rules. This can be seen as a case where "the state has other regulations," and relevant rules should be formulated to clarify the eligibility scope of borrowers and ensure that specialized loans are used for specific purposes and strictly controlled.
In conclusion, the People's Bank is guiding commercial banks to conduct related loan business through stock repurchase and increase financing specialized revolving loans. This allows commercial banks to operate independently based on market principles. This not only avoids moral hazards and interest transfers but also further strengthens the market's survival of the fittest mechanism. Given its practical significance, all parties should make good use of this opportunity and further solidify the foundation for the healthy development of the securities market.