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China preparing for stock margin trade -sources By Samuel Shen
SHANGHAI, Sept 24 (Reuters) - The securities regulator has asked China's two stock exchanges to submit final plans for the introduction of margin trade and short-selling of shares, people with direct knowledge of the situation said.
The move by the China Securities Regulatory Commission (CSRC) may mark a decisive step forward for the reforms, which the government has been studying since 2006, said two sources, who declined to be identified because they were not authorised to speak to the media.
The Shanghai and Shenzhen stock exchanges have completed work on the plans, but the final decision to proceed will be made by the regulator and no timetable has been set, the sources said this week.
"We are basically ready for the reforms," one of the sources said, adding that he believed the regulator wanted to proceed as soon as possible. "The CSRC will have the final say on when they go ahead."
A CSRC spokeswoman said on Wednesday that she could not comment. A spokesman for the Shanghai Stock Exchange did not answer calls seeking comment.
As part of efforts to deepen the stock market and make it more efficient, the government has long intended to introduce margin trade, under which investors can borrow money from brokerages to buy shares, and short-selling, in which they can borrow shares from brokerages to sell them.
The launch of the scheme has been delayed by massive volatility in the stock market -- first a bull run that boosted the Shanghai Composite Index .SSEC sixfold between mid-2005 and last October, and then a bear market which took the index down more than 70 percent.
RESCUE PLAN
But authorities may now believe a government rescue plan for the market is creating conditions under which reforms can proceed.
The index soared 18 percent on Friday and Monday after authorities cut the trading tax and announced that a government fund would buy shares from the market, although the rebound has since stalled because of the turmoil in global equities markets.
"Margin trade could boost trading turnover, while the risks involved in launching short-selling are small after the stock market's bubble burst," said Li Xianming, strategist at Ping An Securities.
"It's actually good timing. The reform should benefit the market," Li said, adding that after the passing of the Beijing Olympics in August, the government would be able to switch its attention to other issues such as capital markets reform.
An introduction of short-selling in China would contrast with regulatory moves in much of the rest of the world. In response to the global financial crisis, U.S. and British regulators this month temporarily banned short-selling of financial stocks, while Australia, Singapore and Taiwan restricted the practice.
But both margin trade and short-selling in China would initially be conducted on a "trial basis" involving a limited number of brokerages and investors, with restrictions on the scale of trading.
This would allow authorities to monitor the impact on the stock market, and suspend trade if they felt short-selling was endangering the market's stability.
Under modified proposals to be submitted by the stock exchanges to the CSRC next month, investors would be allowed to take out loans from brokerages to buy stocks under a process similar to margin trading in Hong Kong, a person with direct knowledge of the plan said.
The use of borrowed funds to buy stocks has been banned in China since the mid-1990s, when the practice fuelled rampant market speculation that triggered a government crackdown.
