China tightens scrutiny over gray-market margin financing

FILE PHOTO: Men rest outside the headquarters building of China Securities Regulatory Commission, in Beijing, China, January 8, 2016. REUTERS/Jason Lee

SHANGHAI (Reuters) - China’s securities watchdog is tightening scrutiny over gray-market margin financing, barring brokerages from facilitating shadow lending and warning against risks of another credit-fueled bubble.

The China Securities Regulatory Commission (CSRC) said on Wednesday that its subsidiary in eastern Zhejiang province last week held a meeting with local brokerages, flagging potential risks associated with illegal margin financing and banning them from doing any form of business that could facilitate such a business.

Earlier in the day, the 21 Century Business Herald reported that in a recent meeting with brokerages, CSRC officials urged the industry to learn the hard lesson from the 2015 stock market crash, which was preceded by a bubble inflated partly by high levels of leveraged trading.

The instructions come as gray-market margin financing business appears to have revived, adding fuel to this year’s sharp stock market rally.

Previously, CSRC said it was closely monitoring the situation, without giving concrete instructions to the industry.

Unlike the official margin lending business, shadow bankers offer investors higher leverage, and at higher interest rates.

Reporting by Samuel Shen and John Ruwitch; Editing by Kim Coghill