Beijing gears up for key reforms on equity trades
Beijing gears up for key reforms on equity trades After years on the drawing board and several false starts, Chinese regulators are finally close to introducing a set of new tools for traders in the country's volatile equity markets. The three innovations, consisting of the introduction of stock index futures, short selling and margin trading, amount to milestones for the country's capital markets. China will launch margin trading and short selling – tools that allow traders to use greater leverage and to profit from falling as well as rising markets – as soon as Wednesday, Zhang Yujun, president of the Shanghai Stock Exchange, told reporters in Beijing over the weekend. Investors will also, for the first time, be able to trade stock index futures – another way to bet on market downturns – from April 16, the China Financial Futures Exchange announced on Friday. “We are making a big step toward a real market with these reforms,” says Jerry Lou, China strategist at Morgan Stanley. Over time, he reckons, the Chinese equity market will become less bubble-prone because investors will be able to short stocks they view as excessively valued. Shanghai stocks jumped the most in seven weeks yesterday on optimism that the reforms would benefit large capitalisation stocks that are part of the CSI 300 index, on which the first index futures will be based. Shares in Chinese brokerages have benefited in recent weeks from the prospect of increased trading revenues. For regulators, the reforms are aimed at spurring innovation and bringing the Chinese stock market closer into line with western norms – part of a drive to transform Shanghai into a global financial centre by 2020. There is an irony here because short selling received a bad press in the west during the financial crisis and its effects continue to worry regulators. UK, US and European nations all clamped down on short selling during the crisis over fears it was exacerbating market slumps, particularly in financial stocks. Not that China is likely to do anything bold at the outset. The latest moves are typical of China's “start small” approach, says Michael Kurtz, China strategist at Macquarie. For a start, initially, the margin trading and short selling pilot programmes have been limited to just six brokerages: Guotai Junan Securities, Guosen Securities, CITIC Securities, Everbright Securities, Haitong Securities and Guangfa Securities. What is more, the majority of Chinese investors will not be able to participate. Any investor using the new tools must open an account with at least Rmb500,000 ($73,000) – ruling out the hordes of small retail investors who are the lifeblood of China's volatile markets. Applicants also need to have held a securities trading account for at least 18 months and must pass an eligibility test to show they understand the risks. So far, applications for margin trading and short selling accounts have trickled in slowly. Fewer than than 10 people opened accounts at each of the six licensed brokers when they first became available last week, Shanghai newspapers reported. “This is starting so small that it may have only a negligible impact at least at first,” says Mr Kurtz. “The question is how quickly will [regulators] feel emboldened to expand [the programme]?” History suggests they will proceed with extreme caution. Officials are still haunted by the collapse of China's government bond futures market in 1995 – just two years after such trading was introduced. Its demise has been attributed to flawed market design, weak governance and price manipulation by market participants. Indeed, five years have passed since plans for short selling and margin trading were first proposed, says Fraser Howie, author of Privatizing China: Inside China's Stock Markets. Plans for stock index futures go back a decade. “Like many things in China, even when these reforms are launched they're not always a success from day one, or even at all,” Mr Howie says. As an example, Mr Howie points to the qualified foreign institutional investor (QFII) scheme that Beijing introduced in 2003 to allow foreigners to buy Chinese securities. Seven years later, fewer than 100 foreign institutions have been approved and less than $20bn of investment quotas have been awarded – equivalent to less than 1 per cent of the Chinese stock market. Those foreign investors do not know whether they will be allowed to participate in short selling and index futures, although all want a piece of the action. There is also heavy debate over what effect, if any, the new types of trading will have on China's notoriously volatile markets, which surged 80 per cent last year after falling 65 per cent the year before. One line of thinking is that the ability to short overvalue |
Beijing gears up for key reforms on equity trades