China increases support for margin trading

[SHANGHAI] Chinese authorities on Monday boosted support for margin trading, which fuelled a stunning stock market rally before government restrictions triggered a spectacular rout last year.

Margin trading, through which investors only need to deposit a small proportion of the value of their trades, potentially generates bigger profits but also exposes them to bigger losses.

It was behind a stock market boom that sent the Shanghai bourse up 150 per cent in 12 months, before it plummeted from last June after regulators moved to tighten rules on the practice.

Authorities have since spent vast sums to prop up share prices, in an intervention that raised questions about their commitment to market forces.

China Securities Finance (CSF), a state-backed agency offering funding services to brokerages for margin trading, cut the interest rates it charges, its website showed, which will make borrowing cheaper for investors if stockbrokers pass on the savings.

CSF - a key part of the "national team" that has bought stocks on the government's behalf - also started offering brokerages short-term loans, on top of the six-month terms previously available.

"The loosening could reignite interest in the equity market, particularly as the regulators' actions last year - to rein back private sector broker leverage - helped trigger the correction in equity prices," Koon Chow, senior macro and currency strategist at Union Bancaire Privee in London, told Bloomberg News.

"It does look like they want a second chance at growing the equity market." The benchmark Shanghai Composite Index was 42.8 per cent lower than the mid-June peak at last Friday's close.

It rose 2.15 per cent on Monday as investors welcomed the change.

China's central bank governor Zhou Xiaochuan told a forum on Sunday that Beijing expects more companies to seek equity funding to reduce their reliance on loans, according to the official Shanghai Securities News.

The world's second-largest economy grew at its slowest pace in a quarter of century last year and Beijing has cut its 2016 expansion target to 6.5-7 per cent.

AFP