(Yicai Global) June 21 -- China's listed companies are repurchasing their firms' shares as they look to keep prices stable and avoid forced selling as the mainland's stock exchanges continue to sink.

The Shanghai and Shenzhen bourses have struggled throughout the year, and saw a rapid decline on June 19 after United States President Donald Trump threatened to whack 10 percent import tariffs on another USD200 billion worth of Chinese goods, prompting China's commerce ministry to accuse the US of violating market laws. The new measures came on top of a 25 percent tax on USD50 billion of Chinese imports announced on June 15.

Many shareholders have pledged some or all of their shares as collateral, and if the price falls beyond a certain limit they will be forced to sell to remain liquid, and could lose control of their companies.

Some 80 firms had already unveiled plans to repurchase shares earlier this month, and another nine disclosed similar plans on June 18 and June 19 alone. The biggest buyback revealed is a deal worth as much as CNY1 billion (USD154 million).

Whether or not the companies actually follow through on their plans remains to be seen, as some may not have enough in the coffers to afford the buybacks. Inner Mongolia Xingye Mining proposed to buy back CNY340 million worth of shares, but only had CNY320 million on the books at the end of the third quarter, so would need to dig deep if it really plans to buy back that much stock.

"Some repurchase plans are just symbolic, they're not the same as actual transactions," said Prof. Dong Dengxin from Wuhan University of Science and Technology. The proposals alone are unlikely to turn share prices around unless the companies can get their fundamentals straight, he added.

Forced selling will be inevitable for some of the shareholders in the wake of the recent turbulence, especially those who pledged their entire holdings, Dong said.

A Pledging Problem

Share prices at mainland-listed firms have collapsed this year, and excessive equity pledging is proving a real vulnerability for those companies and the overall stability of the market.

Some 3,349 of 3,527 companies listed on the Chinese mainland have pledged their shares. The remaining 5 percent have either never pledged shares, or have paid off the associated borrowings.

Of these, shareholders at 128 businesses have offered up more than half of their shares as collateral. Another 226 have promised between 40 and 50 percent of their firm, and 400 have pledged shares worth between 30 percent and 40 percent of the company.

Nearly 30 companies triggered the limit for forced selling, margin calls or collateral replenishment on June 18 and June 19, according to incomplete data.

Inadequate Risk Control

"These issues are a manifestation of risks built up over the year," a source at a major private equity fund in Shenzhen told Yicai Global. "Share purchases and buybacks can pump up prices in the short run, but are not helpful over the long term. Prices will return to a downward trajectory once the immediate response subsides."

"The value of the company is what matters for market participants," added Liao Yunlong, research director at Sunfo Capital. "Share pledging is not a bad thing in itself. The problems are caused by ineffective risk control at financial institutions and excessive pledge rates resulting from competition between them."

"Risk control is inadequate at financial institutions," Dong said. "If it wasn't, some of these problems wouldn't even exist." He believes institutions deliberately flouted risk control rules to bring in more business and/or hit sales targets.

Regulators should impose limits on share pledging, though that would only ensure fulfillment of minimum risk control requirements, he added. Brokerages, banks and other institutions should also learn from this lesson and ratchet up risk management while leaving just enough wiggle room.