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Margin trading likely to start from next year, say analysts

By Li Xiang (China Daily)
Updated: 2009-11-12 08:55

Chinese securities firms are expected to get a clear indication from the market regulator soon on when it would allow margin trading after completing the test runs of the trading networks.

The 11 securities firms, selected by the China Securities Regulatory Commission a year ago for the margin trading experiment, are fully equipped to start the new business under which investors borrow money to buy securities or borrow securities to sell, the Shanghai Securities News reported.

Although the regulator has not given any official confirmation, analysts said market conditions for the new business have matured and it is likely to be launched next year.

"There is no major problem existing in the market and our optimistic estimate is that the new business would be launched next year," said Liao Qing, an analyst at Sealand Securities.

China in recent years has improved its multi-level capital market with the launch of the small- and medium-sized enterprise board and ChiNext, China's NASDAQ-style board, thereby opening the doors for the margin trading business, Liao said.

The country's securities regulator has been considering the introduction of margin trading business since 2006 and it announced the experiment project among 11 eligible securities firms last year.

However, the official launch of the new business was delayed by the breakout of the global financial crisis and the turmoil in the domestic stock market.

Once launched, the margin trading business would shore up the revenues of the securities industry by 15 to 20 percent, Guotai Junan Securities Co's research institute said.

But analysts pointed out that the initial impact on the securities firms is likely to be limited.

"The commission and interests securities firms can gain would be limited because initially they are only allowed to use their own capital and securities and the number of qualified stocks is very limited," Liao said.

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But big securities firms with strong capital holdings will profit from the business in the long run as margin trading will substantially expand their business scope and broaden the use of capital and securities, he said.

The regulator has not clarified the qualifications and criteria for securities firms to do the margin trading business and analysts said the quantum of the registered capital would be a key-deciding factor in the application process.

As a financial leverage, the launch of the new business will change the current one-way trade in the Chinese capital market and help stabilize prices by creating a temporary supply and demand for stocks, analysts said.

"After the introduction of margin trading, the price will better reflect the real value of the stocks and it will be hard for market makers to manipulate stock prices as they have less leverage on hand," said Liao.