China to expand margin trading and short-selling programme

September 17, 2013 Leave a comment

Updated: Tuesday September 17, 2013 MYT 11:19:03 AM

China to expand margin trading and short-selling programme

SHANGHA: 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 Sept. 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. – Reuters

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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