China's approval of margin trading scheme snaps two-day losing streak

Regional markets decline amid approval for China's brokerages to re-lend borrowed cash and equities in effort to buoy falling indices

PUBLISHED : Wednesday, 29 August, 2012, 12:00am
UPDATED : Wednesday, 29 August, 2012, 4:34am


Beijing's plan to boost investor sentiment by expanding margin trading helped mainland stocks buck the downward trend across Asia yesterday.

But the new incentive, likely to usher 120 billion yuan (HK$146.8 billion) of fresh capital on to the domestic stock exchanges, would be only a psychological boost to investor sentiment and analysts cautioned about the risks in conducting margin trading.

The Shanghai and Shenzhen stock exchanges and China Securities Finance yesterday published rules governing the trading system which allows brokerages to borrow cash and equities from other institutions to re-lend to their clients.

The rules took effect immediately after they were published.

The Shanghai Composite Index climbed 17.45 points or 0.85 per cent to 2,073.15 yesterday, ending a two-day losing streak.

The benchmark fell to 42-month lows during the last two trading sessions, losing 1 per cent last Friday before tumbling 1.74 per cent to 2,055.7 points on Monday.

Yesterday's gain was the largest single-day advance since August 6 after the mainland market posted three weeks of losses.

"The rally showed investor expectations for stronger incentives has been heightened," said Shenyin Wanguo Securities analyst Li Xiaoxuan. "But the upward momentum will soon run out of steam if no policies are announced in the near future."

Regional stocks fell yesterday, with the MSCI Asia Pacific Index declining 0.5 per cent to 119.17 points, hitting a three-week low.

Analysts said the regulator approved the liberalisation in an apparent move to bolster investor confidence. Mainland investors are often encouraged to buy shares when incentives are introduced amid a belief that stronger stimulus measures will buoy falling indicators.

Margin trading allows investors to borrow cash from brokerages to buy equities but investors lose money if share prices drop.

Beijing launched the margin trading and short selling trading mechanism in March 2010.

Initially, brokerages could only lend their own cash and equities to clients under a trial run but the China Securities Regulatory Commission (CSRC) said it would expand the programme when the timing was right.

The CSRC was expected to expand the trial at the end of last year after establishing China Finance Corp, a third-party company that offers intermediary services for brokerages to borrow cash and equities from other institutions.

Officials are worried that short selling would worsen the weak market after the benchmark gauge became one of the world's worst-performing indicators in the previous two years.

Short selling enables investors to sell securities they borrow and buy back them later to square their trades.

As of yesterday, the Shanghai indicator was 5.7 per cent off last year's close.

China Securities Journal predicted the expanded margin trading mechanism would result in an additional 120 billion yuan of funds.