China’s securities regulator is tightening control over lending to small stock investors in an attempt to cool an overheated stock market.
The China Securities Regulatory Commission (CSRC) has banned a type of margin-trading business called an umbrella trust, tightened control over other financing and told brokerages to limit potential risks, the commission said in a statement on Friday.
The CSRC has also allowed fund managers to lend shares to short sellers, according to the statement.
The changes would make it easier for bearish traders to bet on a retreat after the Shanghai Composite Index closed at a seven-year high.
The statement cited comments by commission deputy chairman Zhang Yujun (張育軍) to a gathering of brokerage executives.
Zhang was cited as saying the commission plans to intensify inspection and law enforcement efforts.
Chinese stocks have surged. The Shanghai A share market, which is only open to Chinese investors, has almost doubled last year. Chinese investors have piled into stocks now that the property market is weakening and interest rates are falling. Tighter control over lending might reflect concerns that investors are taking on too much risk.
On Friday, Chinese stock index futures tumbled in Shanghai on news that regulators are to clamp down on the use of shadow financing for equity purchases and increased the supply of shares available for short sellers.
“The government is concerned that rising levels of leverage have added to the frothiness in stock prices,” Cornell University professor of trade policy Eswar Prasad said. “So any moves to restrict this leverage will send a strong cautionary signal to retail investors.”
Still, Prasad doubts that regulators will succeed in keeping Chinese retail investors away from stocks. He says there is a lack of savings and investment alternatives in China.
Xavier Smith, who manages international stocks for asset manager Centre Funds and invests in Chinese stocks, said he welcomed the announcement because it would help make China’s stock market safer.
“We’ve had these rules in the US for a long time,” Smith said. “It’s just the Chinese market trying to become more Western.”
When investors can borrow large amounts of money to buy stocks, they can help push a rising market higher, but things can go badly if stocks start to fall: Investors face pressure to sell stocks to repay the loans, potentially turning a market drop into a rout.
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