Chinese tycoons use stocks to borrow from private lenders as banks’ liquidity dries up

As wealthy people in Hong Kong and China face liquidity problems, they are increasingly turning to private lenders and using stocks as collateral for loans.

With public capital markets yet to fully recover, traditional banks remain cautious about lending. Meanwhile, real estate market woes persist, making equities the best collateral option for some ultra-high-net-worth individuals (UHNWIs) to generate liquidity.

“The liquidity constraints that UHNWIs are feeling are very real,” said Gordon Crosbie-Walsh, CEO Asia at Equities First Holdings, a US-based specialist finance company. “Real estate developers are among the clients that have been hit hardest and have struggled to raise funding from investment banks and private banks.”

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Driven by struggling developers and wealthy families in Hong Kong, the Asia-Pacific retail lending market is expected to grow to at least $124 billion by 2023.

“The equity-backed financing opportunities for liquidity-constrained Chinese borrowers are huge for us and other private lenders,” said Crosbie-Walsh, based in Hong Kong.

Lenders expect more wealthy people to borrow against stocks this year as interest rates are expected to fall, which should boost stock prices.

“We are seeing increased demand as people look for a low-interest financing option that they can use for other purposes,” said Crosbie-Walsh.

Equities First provides loans to Chinese borrowers based on the number of shares pledged, usually Hong Kong-listed shares, at a fixed interest rate, typically 3.5 to 4.0 percent.

China represents at least 65 percent of the company’s Asia Pacific loans, which totaled approximately US$300 million across 45 transactions in the first seven months of this year. The Asia Pacific loan portfolio grew nearly 2.8 times over the past four years, driven by accelerated private lending activity.

Stock ownership among the wealthy is also growing. In the second quarter, family offices in Asia Pacific increased their allocations to equities for the third quarter in a row, reaching the highest ratio globally at 40 percent, according to a report from Citi Private Bank on family office investments. The report looked at more than 1,200 single-family office clients globally with net assets of at least US$250 million.

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Gordon Crosbie-Walsh, CEO Asia at Equities First Holdings. Photo: Handout alt=Gordon Crosbie-Walsh, CEO Asia at Equities First Holdings. Photo: Handout>

HSBC, one of the largest private banks, is also seeing a revival in lending against tradable securities, such as shares, to wealthy clients.

“Initially, the rise in interest rates made the carry trade less lucrative. Combined with falling stock prices, this led to deleveraging,” said Jyrki Rauhio, head of credit advisory for Asia Pacific at HSBC Global Private Banking.

But with the Federal Reserve recently delivering the strongest signal yet of an impending policy shift and equity markets showing improvement, “clients are feeling more comfortable using their equities as collateral for project financing,” he said.

Fed Chairman Jerome Powell indicated on August 23 that U.S. policymakers are prepared to cut interest rates, after raising them 11 times from March 2022 through July last year.

Clients are increasingly interested in interest rate protection structures such as collars, which are options used to hedge exposure to interest rate movements, Rauhio adds.

Private banks, which differ from private lenders, require careful assessment of any financing, whether it is to meet cash flow needs, finance real estate, finance investments or monetize illiquid assets.

“In addition to the cost of paying the interest on a loan, which is typically higher in a high interest rate environment, clients should ensure they are financially resilient to meet any additional payments required over the term of such financing,” said Stephen Pearce-Higgins, head of Lombard and Mortgages for Asia Pacific at UBS Global Wealth Management.

He added that diversifying investments and income streams, and maintaining sufficient buffers to withstand market volatility, are important considerations.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, explore the SCMP app or visit the SCMP Facebook page and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.