China Unveils Slew of Rule Changes to Support Struggling Stocks

(Bloomberg) -- Chinese authorities unveiled rule changes aimed at providing support for the country’s beleaguered stock market, which in recent days has seen hundreds of companies issue profit warnings.

Scrapping an automatic margin call threshold, allowing more types of collateral to be used for certain loans, lowering capital requirements for riskier assets and broadening how foreign investors can use their money were among the package of reforms announced late Thursday by the China Securities Regulatory Commission.

While China’s stock market has been slowly recovering this year after being one of world’s worst performers in 2018, this week’s spate of profit warnings helped push the Shenzhen Composite Index to a 3.4 percent drop in the past four days. Policy makers, already grappling with a slowing economy and the trade war with the U.S., have acted to shore up stocks and ease fears of a downward spiral in the market.

“A slowing economy needs investment to boost it and banks are already highly leveraged, so China needs the capital markets,” said Oliver Rui, a Shanghai-based professor at China Europe International Business School. “The slew of measures is timely rain that can provide more liquidity.”

The announcements came just days after Yi Huiman took over at the CSRC. Previous chairmen have been held responsible for the stock market’s poor performance on their watch.

Many of the moves targeted loan financing, a major concern for regulators with memories of 2015’s $5 trillion market crash, which was exacerbated by the rapid unwinding of margin trades. Credit across China has been tightening as the government tries to rein in the nation’s debt pile, with corporate defaults hitting a record last year.

China’s Market Changes

  • Exchanges are drafting revisions to scrap the requirement that a margin call must be made if the stock’s value falls below 130 percent of the loan value
  • More types of collateral will be accepted in margin trading and short selling
  • Authorities plan to encourage securities companies to invest in stocks and exchange-traded funds by lowering capital requirement for riskier assets
  • China will also expand the investment scope for the Qualified Foreign Institutional Investor and RMB Qualified Foreign Institutional Investor programs 

Overseas investors using one of two channels to access onshore markets will in future be able to use funds for margin trading and short selling transactions, the CSRC said. They’ll also be allowed to invest in private funds, futures, options and bond repurchases.

Share pledges, stocks used as collateral for loans to company founders, have become an area of growing concern to regulators as values have fallen. As much as $645 billion of shares have been pledged with banks and securities firms, some 10 percent of China’s total market value, and about a dozen brokerages are suing clients over such loans.

The recent profit warnings may have exacerbated those fears. About 440 firms said on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated, according to data compiled by Bloomberg. Of the more than 2,400 China-companies that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86 percent of those were profitable in 2017.

Thursday’s announcements came a day after the CSRC issued draft rules for a so-called technology and innovation exchange, another attempt to support the market. The venue could provide a home for some of the world’s fastest-growing companies which, despite being Chinese, have usually chosen to go public in New York or Hong Kong.

“Changes at the stock exchanges show that reform is not just limited to the new tech venue,” said Ge Shoujing, a Beijing-based senior analyst at the Reality Institute of Advanced Finance.

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