China stock market

The CSRC poised to extend restrictions on stock sales by major shareholders

PUBLISHED : Tuesday, 05 January, 2016, 6:07pm
UPDATED : Tuesday, 05 January, 2016, 6:07pm

China’s securities regulator is likely to make it harder for major shareholders to sell stocks on the secondary market, as the authority seeks to avoid another punishing sell-off following the sharp declines Monday which triggered a circuit-breaker trading suspension.

The China Securities Regulatory Commission (CSRC), watchdog of the nation’s equity market, is studying rules “to regulate share sales by major shareholders and senior executives in listed companies”, it said in a Q&A published Tuesday morning on its official website.

“The CSRC is studying issuing pre-announcement rules for the major sales of shares during the pre-opening sessions by the above group, and restricting the proportion of shares that they could sell during a given period of time.”

The authority also said it “is open to revising the circuit breaker rules if needed.” The mechanism, introduced by the CSRC to strengthen market stability, brought trading to a halt in the afternoon session on Monday.

This Friday marks the end of a six-month ban on share sales by major shareholders and senior executives which was imposed by the CSRC on July 8 to help stabilise mainland China equity markets that had lost nearly a third of their value in three weeks.

“It seems the CSRC is likely to extend the ban, or introduce other mechanisms to reduce a big sell-off by major shareholders, particulary under the current situation when markets are so volatile,” an unnamed senior analyst with a Shanghai based state-owned brokerage said.

Investors have been fearing a barrage of selling by major stakeholders when the ban is lifted, the broker said, adding that some of the concerns are slightly exaggerated.

“There are always ways to bypass the regulation. For example, a major shareholder can sell their holdings to a shell company on the primary market, and the shell company then sells the shares on the secondary market.”

The Shanghai and Shenzhen markets had the worst kickoff to a new year on record during Monday’s trading session.

A newly installed circuit breaker was triggered temporarily when the CSI 300 Index fell 5 per cent. Shortly after trading resumed the market fell again, amounting to a 7 per cent decline for the day, triggering a second circuit break that halted trading fro the day at 1:33 pm.

Hong Hao, chief strategist with Bocom International, said the circuit breaker mechanism, while intended to calm the market, could explain the “excess volatilities” on Monday.

“A US SEC study shows that a circuit breaker should not be used to suppress volatility. Rather, it should only be triggered during crisis. Clearly, the tight stops of 5 per cent and 7 per cent of China’s circuit breaker has the ‘magnet effect’ as prices gravitate towards the breaker, and prompts a stampede that drains market liquidity,” he said.

Late Monday, Zhejiang Century Huatong Group, a Chinese maker of plastic spare parts for automobiles, said its controlling shareholders and senior executives have pledged voluntarily not sell shares on the secondary market for a year.

At least 10 listed companies had made similar announcements by Tuesday.