White Collar | Mainland China needs to let brokers play a bigger role in market

While putting all shares in central clearing may be the mainland regulator’s idea of a “safe” market structure, the system creates a wide gap with the outside world and erodes the role stockbrokers can play.

In Hong Kong, all retail investors put their shares with brokers, who give them advice and sometimes discourage them from trading too aggressively.

On the mainland, however, all investors put their shares in the central clearing house. Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia has described that as “safe” because mainland brokers cannot easily use clients’ assets for trading.

But is such a “safe” approach needed, given that brokers seldom trade client assets without their consent? By keeping their clients’ shares, brokers can offer them quicker and more comprehensive services for margin financing or new share subscriptions.

Brokers in Hong Kong have a clear picture of their customers’ investment moves and can easily decide if any margin calls are needed to cover shortfalls, or they can ask clients to cut down on their bets and avoid taking on too much risk.

On the mainland, since all shareholdings are in central clearing, the bond between brokers and clients is not that strong. If a broker is not willing to trade for the client, the client can easily shift to another broker.

Mainland investors thus listen to the latest government policy moves rather than their broker’s analysts.