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 authorized to speak on the issue.
China’s action contrasts with regulators in the U.S., 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.”
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 percent 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.
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.
Brokerages
According to the rules, only selected brokerages are allowed to handle margin trades as part of a pilot program. 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.
Source: Bloomberg 26.09.2008 : Zhao Yidi in Beijing at at yzhao7@bloomberg.net; Zhang Shidong in Shanghai at szhang5@bloomberg.net
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