China financial regulators say more co-ordination, data sharing necessary to quell volatility, fraud
China’s stock markets have room for improvement when it comes to coordination and data sharing among regulators to help quell excessive volatility and prevent potential market manipulation, according to a top financial official in Shanghai.
Gui Minjie, chairman of the Shanghai Stock Exchange, acknowledged difficulties in monitoring leveraged capital flows, and indicated the need for enhanced data tracking and information sharing with other regulators.
China’s top financial regulators are mulling over a merger of financial regulatory agencies to create a super agency that would oversee the securities, banking and insurance markets. This enhanced authority would be able to share information and better coordinate policy and, if needed, intervene to stabilise financial markets, sources said.
A decision to create a super regulatory agency will take some time, analysts said. They also noted that even if the merger gets the go ahead, bringing the varied departments together will be a major challenge.
Margin financing is an example of one area that has been linked with excessive market volatility. Credit generated by margin lending fuelled leveraged buying, which underpinned a dramatic rise in the Chinese stock market in late 2014. The sharp downturn that followed months later, beginning from spring through summer last yea,r was also linked to unwinding of leveraged bets enabled by margin financing.
The benchmark Shanghai Composite Index shot up by 130 per cent in 9 months, then crashed 40 per cent in the following two months by mid 2015.
An official with the China Securities Regulatory Commission (CSRC) said that restrictions on data tracking meant the Shanghai and Shenzhen bourses could only trace capital flows on individual trading accounts.
“We are aware of the real-time leverage ratios on the market. However, regarding sources of the capital, whether it comes through banks, trust funds or underground money lenders, we do not know. It should be within the knowledge of banking authorities,” the official said.
The CSRC has been relying on the Shanghai and Shenzhen bourses to monitoring abnormal activities on the stock market.
In January the CSRC issued a new rule restricting major shareholders in listed companies from selling their holdings on the secondary market. The restriction was part of administrative efforts to stabilise market prices.
Gui said earlier this week that the restriction would be temporary, and authorities were likely to loosen the ban once the market stabilises. In its place, he expects the eventual introduction of a new regulation that emphasises pre announcement notification of selling by major shareholders.
In another exmple following the dramatic swoon in stock prices, the CSRC banned “umbrella trusts,” a margin financing tool used to provide 300 per cent leverage.
The CSRC also punished several hedge funds and retail investors for manipulating stock prices.
It also joined hands with the police, raided several hedge funds’ offices and arrested around 10 individuals, for “malicious short selling” in August.
Gui said efforts by the SSE urging listed companies to better disclose information had “worked well.”