Chinese stock regulators raised margin finance requirements on Friday in the name of preventing systemic risk, but kept widely-criticised limits on how much companies price IPOS in place. The amount of collateral required for margin loans would double from 50 percent to 100 percent of the amount borrowed, the Shanghai and Shenzhen stock exchanges and China Securities Regulatory Commission (CSRC) said in separate statements.
At the same time the CSRC said listing companies should keep their IPO pricing relatively low, in accordance with prior guidelines that companies price themselves within industry average valuations. A spokesman for the CSRC said that changes to margin finance would reduce systemic risk and had been prompted by the recent rapid recovery in margin financing activity.
"Basically what we can see from this is that CSRC has learned something from what happened this summer, and is tightening prudential regulation ahead of a rising market, which is a positive," said Oliver Barron, economist at NSBO in Beijing. "Clearly they've been watching the revival of margin finance very closely. That's all a good sign, but the question is how the market will take it. Every time there's been a hint of a move like this in the past the market sold off." Xiao Shijun, an analyst at Guodu Securities in Beijing, said he also expected short-term negative impact from the decisions.
"It may also exert pressure on upcoming companies' IPOs. But it will not have persisting influence on the overall liquidity in the stock market," he said, because it is defending the market against new speculation, not forcing existing positions to close, as in the past. Chinese stock indexes tentatively resumed a bull run in November, helped by a steady rise in margin trading; the daily outstanding margin reached 1.15 trillion yuan ($180.43 billion)on Wednesday, the highest since August 26.
After a brutal 40 percent decline in late summer, prompted in part by a panic sale among margin borrowers, China's main stock indices have recovered around 20 percent since late September, but it is unclear whether it will sustain given gloom in the real economy. In the past investors have often sold shares in advance of anticipated listings, worried that they will cannibalise capital from the rest of the market.
But that cannibalisation was aggravated by CSRC's pricing guidelines; companies desperate to list often priced their IPO cheaply in order to ensure they would get approval, but they would then almost invariably rise by the regulatory limit of 44 percent the first day, making them one-way, quick get-rich schemes for subscribers. In fact, IPOs were so popular that many retail investors would borrow heavily in case they qualified to participate via the official lottery. The CSRC said it would remove the cash escrow requirement for IPOS when they resume.
Regulatory pressure on margin finance has also depressed interest in trading by institutional investors and tightening of margin trade were also widely blamed for contributing to a sharp 30 percent collapse in major indexes in June and July. Offshore Index futures tracking the FTSE China index were down around 2 percent after the announcement.