Amid the equity rout, the mainland is launching a practice banned overseas but investors are wary
Daniel Ren 13 October 2008
Short sellers - who have emerged as arch-villains in the global financial crisis - are ironically being embraced on the mainland as market saviours.
To shore up investor confidence hammered by the global equity rout, the China Securities Regulatory Commission on October 5 gave the green light to long-heralded margin lending and short selling.
That goes against the trend in overseas markets, where short selling has been seriously curtailed recently because of concerns it has encouraged speculation and worsened the stock market slump.
In mid-September, the US Securities and Exchange Commission temporarily prohibited short selling of nearly 800 financial stocks in an emergency move to avert a market collapse. The ban was later expanded to cover almost 1,000 stocks. Britain’s Financial Service Authority followed suit by introducing its own restrictions on short selling.
That the mainland, which has long taken a cautious stance on introducing financial derivatives, is launching these products at a time of global instability has raised eyebrows in some quarters.
Stock index futures, originally set to debut on the China Financial Futures Exchange in Shanghai early last year, are still being held back by the CSRC as officials are wary of potential market turbulence. But the launch of short selling underscores how desperate officials are to arrest a market tailspin that has sliced 57.58 per cent off the value of the Shanghai Composite Index so far this year.
Yet investors who just a year ago would have probably jumped at the chance to invest in new equity products are wary of the new initiatives.
Shen Feng, a white-collar worker at a foreign bank, admits he knows little about short selling or margin trading even though he is a seasoned stock investor.
“The move seems a bit far-fetched,” he said. “Investors like us have yet to learn how the practices work, let alone embark on them.”
Margin lending allows investors to borrow money from brokerages to buy equities while short selling allows them to borrow shares to sell and then purchasing the securities later in an attempt to profit from an expected decline in the stock price.
Unfortunately, hopes that the launch of the new products would lift investor spirits were dashed when the mainland exchanges reopened on October 6 after the week-long Golden Week holiday.
The Shanghai Composite Index fell 5.23 per cent, battered by fears of a deepening global crisis that is leaving no market unscathed. The Dow Jones Industrial Average has lost 21 per cent, the Nikkei-225 Index 28 per cent and the Hang Seng Index 19 per cent since Lehman Brothers Holdings filed for bankruptcy on September 15, while the Shanghai index had remained unchanged despite huge fluctuations in the past few weeks.
Mr Shen, who is now stuck with big paper losses, said the once red-hot mainland-listed stocks have lost their lustre. “The market outlook is uncertain, and my only wish is to get my money back. The margin-lending and short-selling practices mean nothing to me.”
The CSRC has yet to announce when the products will start trading, but insiders say it will require investors to pay large sums of money as deposits, a move to reduce risks.
The regulator said a few select brokerages would start the service in a trial programme. It has been speculated Citic Securities, the country’s largest brokerage, will spearhead the move into margin lending and short selling next month.
Under normal market conditions, short selling contributes to price efficiency. But some analysts have doubted its effectiveness on the mainland, a long-time speculator’s market where millions of retail investors like to chase short-term gains betting on the direction of the indices.
Mr Shen is a typical example.
“It was obvious the market would go north last year, when billions of yuan flooded it, and it was certainly easy to bet,” he said. “It’s different now and skittish investors like me won’t take any risk.”
Ironically, the CSRC said it believed that margin lending would be more popular than short selling for now as brokerages have more cash to lend to clients than shares. The statement reveals the government’s eagerness to spark buying interest, analysts said.
In the past few months, state media outlets such as Xinhua and the People’s Daily published a series of bullish articles calling on investors to buy stocks because they were undervalued. This was interpreted as a sign Beijing was trying to give investors a hint that a sharp rebound would occur once the package of incentives was introduced.
Last month, Beijing scrapped stamp duty on stock purchases and requested state firms such as Central Huijin, a government investment arm, to increase its buying of A shares.
Margin lending and short selling were perceived as another so-called “powerful weapon” to bolster the ailing market because it could add liquidity.
“Relatively speaking, China’s stock market has been tightly regulated in the past years and innovations should be welcome,” said Haitong Securities analyst Zhou Jian. “But margin lending and short selling can only contribute to the long-term growth of the market. For the moment, they are anything but a stimulus.”
Beijing drew up rules governing margin trading and short selling in 2006, when the regulator intended to offer investors more options to listed stocks, a move to tap the country’s massive bank savings.
The prolonged delay betrayed the government’s mounting concerns that it would encourage an overspeculative mood on the volatile market.
Despite the market plunge, many mainland investors still liken themselves to investment wizards such as Warren Buffett, believing they could read officials’ minds and foresee the market direction.
In some cases, Beijing did live up to expectations, intervening to spark an orchestrated rally, such as late April’s cut in stamp duty that pushed the Shanghai index up more than 9 per cent.
Beijing has also fallen back on an old standby - a clampdown on information - by barring major financial websites from posting negative articles or commentaries that showed bearish sentiment. It also streamlined procedures for firms to buy back shares to shore up stock prices.
Beijing hopes another government-inspired rally would play out according to its script. Coupled with margin trading and short selling, the People’s Bank of China recently resumed sales of medium-term bills by companies on the interbank market, where the proceeds can be used to buy back shares of listed firms.
Under the detailed rules on short selling that are pending publication, investors can borrow shares of designated companies.
“The announcement on margin-lending and short-selling practices is another clear message that Beijing will take further action,” said Guotai Junan Securities analyst Zhang Xiuqi. “A correct reading of the announcement is that more good news is in the pipeline.”
The government would set up an intermediary firm to handle margin and shorting businesses for brokerages to better control risks, sources said. The regulator might call a time-out on the practices if the trial run proved unsuccessful, one source said.
Galaxy Securities said the new practices may draw up to 150 billion yuan (HK$171 billion) of fresh capital into the stock market.
“The businesses will send a boost to the brokerages,” said Galaxy analyst Chi Xiaohui. “Nearly 30 securities firms are qualified to offer the services because they can meet the regulator’s requirements.”
Despite suspicions surrounding the move, some officials and analysts touted it as a giant step towards full liberalisation of China’s capital market.
Jing Ulrich, JP Morgan’s China equities chairman, said the new trading mechanism would fundamentally change the “one-sided” nature of the A-share market, allowing investors to profit from both falling and rising markets.
“The introduction of these new financial instruments and attendant higher turnover is also good news for domestic brokers,” she said. “Higher turnover will boost income from brokerage fees.”
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Beijing Braves Rough Seas to Save Market
Amid the equity rout, the mainland is launching a practice banned overseas but investors are wary
Daniel Ren
13 October 2008
Short sellers - who have emerged as arch-villains in the global financial crisis - are ironically being embraced on the mainland as market saviours.
To shore up investor confidence hammered by the global equity rout, the China Securities Regulatory Commission on October 5 gave the green light to long-heralded margin lending and short selling.
That goes against the trend in overseas markets, where short selling has been seriously curtailed recently because of concerns it has encouraged speculation and worsened the stock market slump.
In mid-September, the US Securities and Exchange Commission temporarily prohibited short selling of nearly 800 financial stocks in an emergency move to avert a market collapse. The ban was later expanded to cover almost 1,000 stocks. Britain’s Financial Service Authority followed suit by introducing its own restrictions on short selling.
That the mainland, which has long taken a cautious stance on introducing financial derivatives, is launching these products at a time of global instability has raised eyebrows in some quarters.
Stock index futures, originally set to debut on the China Financial Futures Exchange in Shanghai early last year, are still being held back by the CSRC as officials are wary of potential market turbulence. But the launch of short selling underscores how desperate officials are to arrest a market tailspin that has sliced 57.58 per cent off the value of the Shanghai Composite Index so far this year.
Yet investors who just a year ago would have probably jumped at the chance to invest in new equity products are wary of the new initiatives.
Shen Feng, a white-collar worker at a foreign bank, admits he knows little about short selling or margin trading even though he is a seasoned stock investor.
“The move seems a bit far-fetched,” he said. “Investors like us have yet to learn how the practices work, let alone embark on them.”
Margin lending allows investors to borrow money from brokerages to buy equities while short selling allows them to borrow shares to sell and then purchasing the securities later in an attempt to profit from an expected decline in the stock price.
Unfortunately, hopes that the launch of the new products would lift investor spirits were dashed when the mainland exchanges reopened on October 6 after the week-long Golden Week holiday.
The Shanghai Composite Index fell 5.23 per cent, battered by fears of a deepening global crisis that is leaving no market unscathed. The Dow Jones Industrial Average has lost 21 per cent, the Nikkei-225 Index 28 per cent and the Hang Seng Index 19 per cent since Lehman Brothers Holdings filed for bankruptcy on September 15, while the Shanghai index had remained unchanged despite huge fluctuations in the past few weeks.
Mr Shen, who is now stuck with big paper losses, said the once red-hot mainland-listed stocks have lost their lustre. “The market outlook is uncertain, and my only wish is to get my money back. The margin-lending and short-selling practices mean nothing to me.”
The CSRC has yet to announce when the products will start trading, but insiders say it will require investors to pay large sums of money as deposits, a move to reduce risks.
The regulator said a few select brokerages would start the service in a trial programme. It has been speculated Citic Securities, the country’s largest brokerage, will spearhead the move into margin lending and short selling next month.
Under normal market conditions, short selling contributes to price efficiency. But some analysts have doubted its effectiveness on the mainland, a long-time speculator’s market where millions of retail investors like to chase short-term gains betting on the direction of the indices.
Mr Shen is a typical example.
“It was obvious the market would go north last year, when billions of yuan flooded it, and it was certainly easy to bet,” he said. “It’s different now and skittish investors like me won’t take any risk.”
Ironically, the CSRC said it believed that margin lending would be more popular than short selling for now as brokerages have more cash to lend to clients than shares. The statement reveals the government’s eagerness to spark buying interest, analysts said.
In the past few months, state media outlets such as Xinhua and the People’s Daily published a series of bullish articles calling on investors to buy stocks because they were undervalued. This was interpreted as a sign Beijing was trying to give investors a hint that a sharp rebound would occur once the package of incentives was introduced.
Last month, Beijing scrapped stamp duty on stock purchases and requested state firms such as Central Huijin, a government investment arm, to increase its buying of A shares.
Margin lending and short selling were perceived as another so-called “powerful weapon” to bolster the ailing market because it could add liquidity.
“Relatively speaking, China’s stock market has been tightly regulated in the past years and innovations should be welcome,” said Haitong Securities analyst Zhou Jian. “But margin lending and short selling can only contribute to the long-term growth of the market. For the moment, they are anything but a stimulus.”
Beijing drew up rules governing margin trading and short selling in 2006, when the regulator intended to offer investors more options to listed stocks, a move to tap the country’s massive bank savings.
The prolonged delay betrayed the government’s mounting concerns that it would encourage an overspeculative mood on the volatile market.
Despite the market plunge, many mainland investors still liken themselves to investment wizards such as Warren Buffett, believing they could read officials’ minds and foresee the market direction.
In some cases, Beijing did live up to expectations, intervening to spark an orchestrated rally, such as late April’s cut in stamp duty that pushed the Shanghai index up more than 9 per cent.
Beijing has also fallen back on an old standby - a clampdown on information - by barring major financial websites from posting negative articles or commentaries that showed bearish sentiment. It also streamlined procedures for firms to buy back shares to shore up stock prices.
Beijing hopes another government-inspired rally would play out according to its script. Coupled with margin trading and short selling, the People’s Bank of China recently resumed sales of medium-term bills by companies on the interbank market, where the proceeds can be used to buy back shares of listed firms.
Under the detailed rules on short selling that are pending publication, investors can borrow shares of designated companies.
“The announcement on margin-lending and short-selling practices is another clear message that Beijing will take further action,” said Guotai Junan Securities analyst Zhang Xiuqi. “A correct reading of the announcement is that more good news is in the pipeline.”
The government would set up an intermediary firm to handle margin and shorting businesses for brokerages to better control risks, sources said. The regulator might call a time-out on the practices if the trial run proved unsuccessful, one source said.
Galaxy Securities said the new practices may draw up to 150 billion yuan (HK$171 billion) of fresh capital into the stock market.
“The businesses will send a boost to the brokerages,” said Galaxy analyst Chi Xiaohui. “Nearly 30 securities firms are qualified to offer the services because they can meet the regulator’s requirements.”
Despite suspicions surrounding the move, some officials and analysts touted it as a giant step towards full liberalisation of China’s capital market.
Jing Ulrich, JP Morgan’s China equities chairman, said the new trading mechanism would fundamentally change the “one-sided” nature of the A-share market, allowing investors to profit from both falling and rising markets.
“The introduction of these new financial instruments and attendant higher turnover is also good news for domestic brokers,” she said. “Higher turnover will boost income from brokerage fees.”
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