Shanghai: China’s securities regulator has urged domestic brokerages to cease financing clients’ stocks purchases through swaps and other over-the-counter contracts, two sources with direct knowledge told Reuters, its latest move to reduce leveraged financing risk in the country’s stock markets.
The China Securities Regulatory Commission is mainly targeting the total return swap business, agreements that in effect allow investors to obtain leverage from brokerages to bet on both listed and unlisted equities, said one source.
According to the CSRC’s window guidance, brokerages must cease such swap businesses and must not extend business on existing arrangements.
CSRC had wanted to suspend the business during the summer market rout but did not do so due to lobbying from brokerages, which wanted to preserve a lucrative line of business, the source said.
The CSRC did not respond to calls requesting comment.
“This move is aimed at further regulating financing activities and controlling leverage,” said Liao Qun, China chief economist at Citic Bank International.
“High leverage and over-the-counter financing is one of the factors that has led to the stock market turmoil this year.” The OTC swap business has been growing rapidly over the past two years, with an accumulative 458.2 billion yuan ($71.71 billion) worth of transactions conducted during the first 10 months of this year, according to the China securities industry association. Outstanding business stood at 121.7 billion yuan ($19.05 billion).
High-risk market
“Margin loans may decrease by 100 or 200 billion yuan in the next few days after this measure,” said Liu Jingde, an analyst at Cinda Securities in Beijing.
“The authorities are obviously controlling the ratio of margin trading. You can borrow money, but at a low ratio, otherwise it may become a high-risk market like the futures market, which was unacceptable to the authorities.” Earlier in November, China doubled stock margin finance collateral requirements to 100 per cent of the amount borrowed to reduce systemic risk in its markets.
While the most recent crackdown signals concerns about leverage, it also highlights confidence by regulators that they can tighten leveraged trading without setting off another market crash, as happened repeatedly earlier in the year.
The benchmark CSI300 index has been on a steady recovery in recent months, rising 25 per cent since a nadir hit in late August, and that recovery has been sustained even in the face of moves to raise margin ratios and otherwise clamp down on riskier forms of trade.
