China’s securities regulator is considering a change to its margin finance rules in a move that could quell volatility should the country’s world-beating stock-market rally falter.
The China Securities Regulatory Commission may allow brokerages to roll over margin trading and short-selling contracts with clients one or two times for six months each, people with knowledge of the matter said. They asked not to be identified as the plans haven’t been finalized or made public.
Record trading with borrowed money has pushed Chinese stocks to a seven-year high even as economic growth slows, sparking concerns that the market may overheat. Letting investors extend their contracts may help to limit the risk that margin calls would trigger a sharp selloff.
“By allowing rollover, the CSRC may want to curb short-term speculation and ease volatility as investors don’t have to sell their holdings when the market is not in their favor,” said Zhang Jian, a Beijing-based strategist at BOC International Holdings Ltd. “The regulator is trying to put in place a fundamental mechanism of margin trading rather than simply tighten or loosen it.”
The CSRC didn’t immediately respond to a fax seeking comment on the plans.
The commission told a briefing on Friday that it’s making revisions to margin trading and short-selling rules to promote their “orderly development,” spokesman Zhang Xiaojun said at the time. It aims to seek public feedback on revisions to margin trading and short-selling rules at an appropriate time, the CSRC’s Zhang said, without giving further details.
Under current rules developed in 2006 and revised in 2011, the duration of margin finance and securities lending contracts can’t exceed the longest term determined by the stock exchanges, which is six months. The period can’t be extended.
China’s securities firms have extended a record 2.17 trillion yuan ($350 billion) of margin debt, helping to propel the Shanghai Composite Index 58 percent higher since the start of 2015. It slipped 0.4 percent on Tuesday, a day after reaching the highest level since January 2008.
In January, Citic Securities Co., Haitong Securities Co. and Guotai Junan Securities Co. were punished by the CSRC for allowing customers to delay repayment of margin finance for longer than they were supposed to. The three firms were banned from extending new margin finance loans until April, when the restrictions were lifted.
Brokerages across China are tightening requirements for lending to stock investors to try to limit the risks from any market bust. Changjiang Securities Co. joined larger rivals GF Securities Co. and Haitong Securities in increasing its margin requirement, the collateral put up by an investor when borrowing.
— With assistance by Steven Yang, Laura Yin, and Jun Luo