China to expand margin trading and short-selling programme

SHANGHAI Tue Sep 17, 2013 4:02am BST

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SHANGHAI (Reuters) - China's securities regulator has approved a plan to expand participation in a pilot programme allowing margin trading and short selling and triple the number of stocks that can be traded on margin, as Beijing moves to deepen and diversify investor participation in its equities markets.

The China Securities Finance Corporation Ltd, the semigovernmental agency that runs the trial, named 19 new brokerages that will be allowed to participate in the project, bringing the total number of brokerage participants to 30 from the original 11.

These brokerages will be allowed margin trading and short selling for 287 stocks, comprising 64.3 percent of the Chinese A-share market's capitalisation, up from the current 87 tickers available, the agency announced on its website.

The new regulations will come into effect September 18.

China has been gradually expanding its margin trading programme, hoping to add liquidity and improve price discovery in its stock markets, but caution has ruled. Brokerages can only trade highly liquid major tickers in profitable companies on margin, limiting opportunities for targeted short selling.

Analysts have pointed out that other aspects of the political system - in particular the ability of powerful firms to use the law enforcement system to suppress criticism - make short selling highly risky on a personal level for those who engage in it.

Recent campaigns against "rumour mongering" through social media will also inhibit short selling strategies that rely on the dissemination of negative reports about companies online in order to drive their stock prices down.

Government and industry associations have publicly railed against short-seller attacks on Chinese firms listed in New York and Hong Kong that have caused multiple delistings, but short sellers have complained that Beijing is more interested in protecting the ability of Chinese companies to fundraise than the interests of ordinary investors.

At the same time, investors remain highly suspicious of reports of insider trading and other forms of market manipulation by brokerages and other market players using derivatives, and deep government involvement in the operation of many major listed firms adds another layer of opacity to the market.

Regulators and brokerages are concerned by signs that Chinese investors are souring on equities in general, letting trading accounts go dormant and moving their money into real estate and high-yield wealth management products instead.

In August, China Everbright Securities was hit with a record fine and multiple forced executive resignations after the company tried to compensate for erroneous trades by making massive hedging bets in the index futures markets. When markets collapsed again, the hedged bets paid off for Everbright, but many retail investors took massive losses.

(Reporting by Pete Sweeney; Editing by Chris Gallagher)

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