China said to ban brokerages selling third-party margin products

[SHANGHAI] China barred brokerages from selling third- party financing products that help clients invest in stocks using borrowed money, such as umbrella trusts and those offered by peer-to-peer websites, people familiar with the matter said.

Seeking to rein in the use of leverage to buy stocks, the China Securities Regulatory Commission also told brokerages they may not offer margin financing and securities lending to clients with less than 500,000 yuan (US$80,000) of assets, said the people, who asked not to be identified because the matter hasn't been made public. That directive was a reiteration of a restriction from Jan 19.

The CSRC didn't immediately respond to an e-mailed and faxed request for comment. Sina.com first reported the regulator's ban on the third-party products earlier on Friday.

The restrictions are part of a move to contain risks from record levels of margin financing that may threaten the Shanghai Composite Index's 39 per cent rally in the past six months. The CSRC last month suspended three of the nation's biggest brokerages including Citic Securities Co from adding margin- finance and securities lending accounts for three months following rule violations.

In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors' equity holdings, meaning that they may be forced to sell when prices fall to repay their loan.

Investors with assets of less than 500,000 yuan who opened margin-finance and securities lending accounts before Jan 19 will not be forced to close their positions, the people said, citing a document issued by the CSRC.

Brokerages may not provide margin finance and securities lending to clients with a trading history of less than six months, they said.

Wealth-management products have been used to channel 300 billion yuan to 500 billion yuan into shares, Goldman Sachs Group Inc estimated in a Jan 19 note. So-called umbrella trusts, which allow more leverage than broker financing, have helped drive the stock boom.

BLOOMBERG