China aims to lift confidence with compensation fund
(FT.com)
Updated: 2005-09-29 20:39

China's new fund to compensate investors in bankrupt brokerages could potentially be used to intervene in the stockmarket, analysts and fund managers said on Thursday.

The government officially launched the compensation fund on Thursday, the latest in a series of measures it has introduced to try and restore confidence in the country's struggling stockmarket.

The announcement said that the fund was designed to protect investors who have money in failed brokerages. However, it added that it could also be used "in other ways approved by the State Council". The other purposes were not specified.

"Among other things, it could clearly be used to prop-up the market, especially if it grows to a large size," said Fraser Howie, co-author of a book on the Chinese stockmarket.

A fund manager in Shanghai said: "If the market remains weak over the next few years, I would not be surprised to see the fund being used to buy stocks."

The government has been preparing the fund for a number of months and the China Securities Regulatory Commission, the capital markets regulator, admitted earlier this month that an initial injection of Rmb6.3bn of public money had been put into the fund.

At the same time, the government has also been analysing proposals to set up a separate fund to intervene directly in the stockmarket at times when prices are falling sharply, based on similar experiences in Taiwan and Hong Kong.

A government official told the Xinhua news agency that the fund would be financed from commissions on share trading, contributions from brokerages and a charge on new stock and bond offerings by companies.

The Shanghai composite index rose 2.1 per cent on Thursday on news that the fund had been formally established. However, market observers said there were still many uncertainties about how it would be managed.

According to Cao Fengqi, director of the Finance and Securities Research Centre at Beijing University: "It is hard to tell the function of the fund at this moment. How those investors can be insured and how much compensation those investors may get, it's not clear yet," he said.

The fund has been designed to address the parlous state of China's brokerages, which registered a combined loss of Rmb15bn last year.

As well as pushing for weak brokerages to be closed down, the regulators have signaled this week a greater willingness to let foreign investment banks enter the Chinese market as a means of strengthening the brokerage sector.

On Wednesday, UBS announced it would spend Rmb1.7bn to bail out Beijing Securities, an ailing brokerage, in exchange for management control and a 20 per cent stake, in what could be the first stage in a radical shake-up of the sector.

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