Banks, insurers may support short selling
In a move to boost liquidity on the share market, the mainland securities regulator has finalised a draft rule governing the participation of banks and insurers in margin trading and short selling of stocks.
The proposed rule has been drawn up by the China Securities Regulatory Commission, which has started soliciting reaction from government and corporate officials, according to two people with knowledge of the matter.
If the CSRC implements the rule, brokerages will be allowed to borrow money or securities from counterparts, banks, and insurers to support their margin trading and short-selling operations. The CSRC did not reply to queries seeking confirmation of the development.
Beijing introduced margin trading and short selling in March, allowing six brokerages to lend their own cash and equities to individual clients who want to borrow funds to buy stocks and the securities to support short selling. In June, another five brokerages received approvals to conduct the businesses.
As of now, most investors borrow cash from brokerages to buy shares while short selling represents only a small portion of daily trade.
'A primary concern is whether investors would borrow shares heavily for short selling if the regulator were to expand the trading system,' said Orient Securities' analyst Joseph Kao. 'In addition, the existing regulatory framework isn't enough to monitor rogue trades.'
In short selling, investors sell the securities they borrow and buy them back later to square their trades.
Analysts predict the changes in the short-selling regime wouldn't be implemented soon in view of the strong rally recently. The Shanghai Composite Index has climbed 14.3 per cent since September 30, buoyed by an influx of speculative capital.
A strengthening domestic currency has ushered billions of yuan into the mainland market, though analysts are wary of an imminent boom-to-bust cycle.
Beijing had planned to launch margin trading and short selling in late 2008. But the regulator put the plan on ice, spooked by fears that a hefty drop would result from heavy short selling amid the global financial turmoil.
The regulator was to set up third-party companies to offer intermediary services for brokerages to borrow cash and equities from other institutions to fund their own margin trading and short selling businesses.
