UPDATE 2-China to launch stocks margin trade, short sales

Sun Oct 5, 2008 9:20am EDT

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By Samuel Shen and Lu Jianxin

SHANGHAI Oct 5 (Reuters) - Chinese regulators, seeking to support the equities market in the face of global financial turmoil, said on Sunday they would soon allow investors to buy stocks on margin and to conduct short-selling of stocks.

The reforms, which have been approved by the cabinet, will initially be conducted on a trial basis by a small number of brokerages and gradually expanded to other securities firms, the China Securities Regulatory Commission said in a statement.

The introduction of short-selling in China would contrast with regulatory moves in much of the rest of the world. In response to the global crisis, U.S. and British regulators last month temporarily banned short-selling of financial stocks, while Australia, Singapore and Taiwan restricted the practice.

But the commission said, "The launch of margin trade and short-selling is an important step in the reform and development of our capital markets, and will inject new vitality into the securities market."

China has been considering since 2006 starting margin trade, in which investors borrow money from brokerages to buy shares, and short-selling, where they borrow stocks from brokers and sell them in the hope of buying them back later at lower prices.

Its launch of the reforms has been delayed by massive market volatility: a bull run that boosted the Shanghai Composite Index .SSEC sixfold between mid-2005 and last October, and then a bear market which took the index down more than 70 percent.

But authorities now appear to believe a government rescue plan for the market is creating conditions under which the reforms can proceed.

The index has rebounded 21 percent from a 22-month low hit late last month in response to steps including purchases of shares from the market by a government fund, and the abolition of the tax on stock purchases.

The commission said on Sunday that it would monitor its reforms closely to reduce risk, and because brokerages had only a limited amount of stocks available to lend, it expected "margin buying will greatly exceed short-selling" in the initial stage.

INVESTOR CONFIDENCE

By underlining the government's desire to stimulate the market, the commission's announcement may encourage fresh buying of Chinese stocks this week, analysts said.

"The government clearly wants to prevent the panic in overseas markets from spreading to the domestic market," said Li Xianming, strategist at Ping An Securities.

"This will keep people guessing about the next step which the government may take to support the market." Some investors are hoping for the introduction of stock index futures, another reform which has been under consideration for years.

The commission did not specify exactly when margin trade and short-selling would start, or name the brokerages that would take part in the initial stage of the reforms.

But many analysts say the first batch of brokerages will include CITIC Securities (600030.SS), the largest listed securities firm, and China International Capital Corp. Shares in CITIC Securities have jumped 52 percent since late last month because of such speculation.

"This will give investor confidence a short-term boost," said Cao Xuefeng, analyst at West China Securities. "But the market's medium-term trend will continue to depend on global markets and on China's economic performance."

The use of borrowed funds to buy stocks has been banned in China since the mid-1990s, when the practice fuelled rampant market speculation that triggered a government crackdown. (Writing by Andrew Torchia; Editing by Erica Billingham)

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