China to Allow Securities Margin Trading

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Oct. 6 – The China Securities Regulatory Commission (CSRC) said it will soon allow firms to do low margin trading and short selling on a trial basis.

In a statement made on its website on Sunday, the CSRC did not specify the date of commencement for the trading. It said, “With the agreement of the cabinet, the CSRC will in the near future launch margin trading and short selling on a trial basis.”

The move will allow traders to borrow part of the money needed to buy a security or borrow security to sell. It will also serve as a risk aversion tool for investors and should instill confidence in the country’s stock markets amid the banking crisis rocking the United States.

Currently, the Shanghai and Shenzhen stock markets practice one-way trade. The CSRC said it will choose the first group of eligible securities firms based on their net capital, solvency and operation capability, compliance audit, current risk of control indexes and plans for the business trial run.

The trial run is open to all securities firms in the country. The CSRC will release the qualifications and criteria at a later date and promises to seek the counsel of an expert panel to handle applications.

Once in place, securities firms will be allowed to only use its own capital and securities for the trial run with the initial margin will be set at 50 percent of the purchase price when buying eligible securities or 50 percent of the proceeds of a short sale.

The maintenance margin, or the sum required to be maintained on deposits, will be set at a minimum of 30 percent of the financed equity value.

Margin trading is when investors borrow money from financial institutions to buy shares or other securities which they predict will increase in value while short selling is when investors borrow shares to sell them on in the market and expecting the price to decline.