China’s cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia’s second-largest market after prices and trading volumes slumped, an official familiar with the plan said.
The State Council signed off on a China Securities Regulatory Commission plan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn’t authorised to speak on the issue.
China’s action contrasts with regulators in the US, Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China’s government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.
“It’s quite positive for the market and will help attract fresh capital into equities,” said Wu Kan, a fund manager in Shanghai at Dazhong Insurance Co, which oversees the equivalent of $285 million. “Given the current level the index is standing at now, I do think some investors will buy low through margin trading so as not to miss the boat.”
In short sales, investors sell stock they don’t own, betting they will be able to buy it back at a lower price and profit from the difference. They borrow money to buy stocks in margin trading if they expect share prices will rise.
The Chinese government carefully timed the move to limit the impact on the market’s stability, said the official.
China has scrapped the tax on stock purchases and relaxed company buyback rules to help support the world’s second-worst performing stock market this year.
Higher Returns: The CSI 300 rose 0.9 per cent today and added 8.2 per cent this week, the first weekly gain in nine weeks. China Investment Corp, the nation’s $200 billion sovereign wealth fund, bought shares in Industrial & Commercial Bank of China Ltd, Bank of China Ltd and China Construction Bank Corp, the nation’s three largest state-owned banks, in the past week, after a 58 per cent slide in the CSI 300 this year.
Shang Fulin, chairman of the Beijing-based securities regulator, is trying to introduce more financial tools to allow investors to earn higher returns and hedge against investment risks at a time of turmoil in global financial markets.
The US government plans to use $700 billion to buy troubled assets from financial firms after $524 billion of losses worldwide from subprime that led to the collapse of Lehman Brothers Holdings Inc, the US government’s rescue of American International Group Inc, and the sale of Merrill Lynch & Co to Bank of America Corp.
Index Futures: Short selling may accelerate the introduction of stock-index futures that will allow investors to short contracts on the CSI 300 to hedge risk. The China Financial Futures Exchange published rules in June 2007 that said investors would be required to put up 10 per cent of a contract’s value to buy, sell or short sell CSI 300-based futures. No date was given at the time for when the products will start trading.
“If you can sell borrowed stocks, it’ll enhance the possibility of making a profit by shorting index futures contracts,” said Fan Dizhao, an investment manager at Guotai Asset Management Co in Shanghai, which manages the equivalent of $5.l billion.
Shares worth an average 118 billion yuan ($17 billion) changed hands every day on the Shanghai and Shenzhen stock exchanges this year, 38 per cent less than the 191 billion yuan in 2007, according to Bloomberg data.
About 8.7 million new trading accounts have been opened in China this year, compared with 38 million last year, bringing the total to 101.5 million, according to statistics from China Securities Depository & Clearing Corp.
Key Task: Short selling and margin lending “will attract inflow of some capital into the stock market, but won’t help reverse the market trend unless expectations about corporate earnings growth improve,” said Wu Youhui, a strategist at GF Securities Co in Guangzhou. “Brokerages will benefit most as they'll have a new source of income.”
It will take several days for the paperwork to go through, and the plan will be announced before the week-long National Day holiday next week or right after it, said the official.
Pushing out margin trading and short selling is China’s securities regulator’s key task this year, as set out at the 2008 annual working meeting, said another official familiar with the CSRC’s work.
China published rules in 2006 allowing individuals and institutional investors to make margin trades and short sell an unlimited amount of stocks, however a proposal wasn’t submitted to the State Council until this month.
Brokerages: According to the rules, only selected brokerages are allowed to handle margin trades as part of a pilot programme. They must have three years trading history and net assets of no less than 1.2 billion yuan for the past six months.
The regulator stated that only companies with market values greater than 800 million yuan and with stable share prices are eligible to be sold short.
China clamped down on unauthorised margin trading in 1997 and 2001, when banks were found to have illegally channelised money into the stock market.
The CSI 300 has tumbled this year on concern that the central bank’s efforts to tame inflation, which reached a 12-year high in February, and weakening economic growth will hurt earnings. China’s economy grew 10.1 per cent in the three months through June, slowing for a fourth quarter.
The index rose more than sevenfold between July 2005 and October to become the world’s most expensive market relative to earnings.
