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.
Brokers in Hong Kong have a clear picture of their customers’ investment moves
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.
Since July 4, Beijing has introduced a range of measures to prop up the falling market that will further skew the view of retail investors. They will continue to believe in a market going up because the government is stepping in to prevent it from falling.
The rescue plan also led brokers and insurers to buy shares or prevent selling to prop up the market. Banks also need to lend money so that companies or shareholders can buy back shares. These moves are not based on fundamentals.
The mainland has a long way to go to match international market practices. Changing the market’s structure to allow brokers and other institutional investors to play a bigger role is an essential step on that journey.
