China Regulators Ban Derivatives For Financing Stock Purchase

securities association of china

(Bloomberg) — The Securities Association of China will ban brokerages from offering financing for stock market trading using derivatives, the country’s securities regulator said.

Brokerages should provide funding to their clients using margin trading tools that comply with the rules, China Securities Regulatory Commission spokesman Zhang Xiaojun said Friday at a briefing. Swaps offered by some brokerages have deviated from their role as a risk management tool, instead becoming a way to offer unofficial margin loans for investors, Zhang said.

China’s regulators are attempting to prevent another build up of leverage in the stock market similar to the borrowing binge that took place earlier this year and helped propel the boom and then bust in Chinese share prices. Earlier this month, the country’s two mainland stock exchanges doubled margin requirements to 100 percent in another move to limit leverage in the market.

“After the stock market rout, regulators have a new understanding about leverage,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said by phone. “Their measures have been focusing on deleveraging and reducing risk and this policy stance should continue. The regulators will be more conservative and prudent than before.”

Zhang was confirming a report Thursday in Caixin magazine, which said China’s brokerages were told to wind down the business of offering total return swaps, a type of over-the- counter derivative, for clients who want to trade stocks.

At the end of October, the over-the-counter derivative businesses of 39 brokerages had an outstanding nominal value of 279 billion yuan ($43.7 billion), according to data from the Securities Association of China. Of that, swaps accounted for 44 percent by value, while options contracts accounted for the rest.

The amounts involved in the swaps compare to China’s official margin finance balance of more than 1.2 trillion yuan.

The total return swaps can offer three to five times leverage because the investor pays only a deposit to the broker and then a fixed-interest payment at the end of the contract, in return for receiving a floating return on the stocks.

China BrokerDealers Baffled By Exchange Snafu

shanghai exchange update is courtesy of extract from coverage from consequent to Monday snafu at the Shanghai Stock Exchange , when China’s stock trading was so abundant that the Shanghai Stock Exchange’s software was unable to properly display the turnover data – apparently there were too many zeros to factor in.

Turnover on the Shanghai Stock Exchange exceeded 1trn yuan ($161.28bn) for the first time on the 20th April, but the country’s trading fever hit the news for a different reason – the exchange’s software was not designed to report volumes that high and, as a consequence, the data couldn’t be displayed properly.

A statement released by the Shanghai Stock Exchange confirmed that “this is software configuration issue, not a technical glitch.” It continued to explain that current software package, called SHOW2003, would need to be replaced in order to handle the higher volumes of reporting. Trading and price quotes for individual stocks were not affected, however.

For a directory of Hong Kong and Asia market brokerdealers, provides the only global database of broker-dealers across the world

Resolving the software issue will be of upmost importance given the rapid growth of China’s stock market, which has nearly doubled over the past six months. The Shanghai Stock Exchange is now the world’s biggest in terms of turnover, totalling $1.85trn in March this year – surpassing the New York Stock Exchange which had a turnover of $1.53trn for the same month.

The last time this kind of software story was in the news, it was under very different circumstances: namely when the US national debt clock went past the $10trn mark in 2008. The upgrade to fix that glitch saw two extra digits added to the clock in anticipation of the country’s burgeoning debt.

How To Get Shorty Stocks in Shanghai: Even Confucius is Confused

get blog update profiles the challenges of getting short shares listed on the Shanghai Stock Exchange, courtesy of extract from 06 March WSJ report by Gregor Hunter “Bejing Comes Up Short With Stock Bets”

A week after China allowed foreign investors to bet against shares on the mainland, no one had taken up the challenge. Industry officials say the rules that govern how the short selling should be done make it nearly impossible to bet against the stocks.

The opening of Chinese shares to short selling came as part of the Shanghai-Hong Kong Stock Connect, which gives foreign investors unprecedented access to China’s main stock market in Shanghai. The connection opened in November and trading volume has been weak in its initial months.

Regulators approved short selling via Stock Connect beginning on Monday, and no shares were sold short during the first week of trading, according to data from the Hong Kong Stock Exchange.

Asked whether Stock Connect currently permits short selling of shares, Andy Maynard, global head of trading and execution services at CLSA said: “In theory, yes it does. In practice, no it doesn’t.”

To access brokerdealers in China-marketplace, provides a comprehensive database that can be downloaded.

According to the Stock Connect rules, shares must be loaned out by exchange participants, which generally means brokers. But they typically don’t have shares to lend, instead those shares generally come from custodians or asset managers. And loans of shares between companies—even if they are affiliates of the same bank or fund manager—are prohibited.

“There’s no way you can get the stock into the exchange participant account for that exchange participant to be able to lend to the Street,” CLSA’s Maynard said.

Hong Kong Exchanges and Clearing chief executive Charles Li said that he didn’t know why no shares were shorted in the first week, but that the exchange was “not concerned”.

He acknowledged that the rules made it difficult to short in China. “Only brokers and broker affiliates can participate. If they’re not able to lend, there’s not a lot of shares to borrow from,” Mr. Li said

For the full story from the WSJ, please click here

BrokerDealers Speculate China’s Yuan Will Be Next blog update courtesy of MarketWatch’s Craig Stephen.

Some brokerdealers are still recovering from the shock they received last week, when the National Swiss Bank unexpectedly announced on Thursday that they would be scrapping a three-year-old cap on the franc. Now they are trying get ahead of the curve and are predicting that China’s yuan will be the next shoe to drop, so to speak.

The surprise move by Switzerland to scrap its currency ceiling against the euro EURCHF, -0.94%  last week is a reminder there can be unexpected collateral damage from central banks waging currency wars. As markets digest last week’s turmoil, expect focus to turn to other fault lines on the global currency map.

Here China stands out, as like the Swiss, it runs an implicit currency peg that is becoming increasingly painful to maintain.

Due to its longstanding crawling peg to the U.S. dollar, the yuan USDCNY, -0.21%USDCNH, +0.00%  has increasingly found itself pulled higher against just about every major currency. The world’s largest exporter has already had to endure two years of aggressive yenUSDJPY, +0.85%  devaluation since the introduction of Abenomics and its accompanying quantitative easing.

Now comes a new front, as the European Central Bank (ECB) looks ready to green-light its own QE next week. The move by Switzerland also means the Swiss National Bank (SNB) ceases its purchases of euros needed to maintain its peg, again meaning the euro will all but certainly head lower.

Further currency strength is likely to be distinctly unwelcome for the Chinese economy. Later this week, gross domestic product figures for 2014 are widely expected to show growth at its slowest pace in 24 years if, as some predict, the government’s 7.5% annual growth target is missed. This comes at the same time that the economy is flirting with outright deflation and amid a new trend of foreign capital exiting China.

Last week’s currency ructions present a new headwind to growth as exports will be harder to sell across Europe, China’s second biggest market after the U.S.

The other danger looming for China is that a strong currency exacerbates deflationary forces. Producer prices have been falling for almost three years, and the plunge in crude-oil prices adds a further disinflationary bent. The property market looks as if it could also push prices decisively lower. Prices of new homes in big cities fell 4.3% in December from a year earlier, according to new government data released over the weekend.

The difficulty for Beijing is that these external movements in currencies are outside its control. If moves to depreciate the euro EURUSD, -0.38%  trigger another round of competitive deprecations, just how much more yuan appreciation can China withstand?

While the policy actions of both the Swiss and European central banks last week appear quite different, they share a common feature: Both acted with reluctance only when the pain became too much to bear.

The reason deflation is public enemy No. 1 for central banks is that debt becomes much harder to service and can stall growth and employment as consumers put off purchases and business put off investment.

China certainly has debt levels that would make deflation worrisome. Total debt levels are now estimated to be in excess of 250% of GDP. Lower-than-expected bank loan growth in December also suggests demand in the economy is already weak.

The other area to be concerned about is capital flows, as investors remove bets on further yuan appreciation. In recent quarters, we have seen signs of hot-money flows exiting China and foreign-reserve accumulation reversing.

Fourth quarter 2014 figures showed that Chinese forex reserves declined by $48 billion to $3.84 trillion. This could reflect both a forex-valuation effect and capital outflows with the euro and yen depreciating by 4.2% and 9.3%, respectively, against the dollar during the period, according to Bank of America data in a recent note.

Outflows widened to $120 billion in the fourth quarter from $68 billion in the third quarter, Bank of America said.

Meanwhile there are already signs liquidity is tightening. Latest figures show China’s money supply contracted in December, with M2 growth slowing to 12.2% from 12.3% a month earlier. Bank of America notes that M0 — the most narrow measure of liquidity — has been growing very slowly due to slumping foreign-exchange purchases by the People’s Bank of China (PBOC).

This combination of money outflows and tighter liquidity shows the challenge facing the PBOC. If capital outflows were to accelerate, it will need to use up more of its foreign-exchange reserves to maintain its currency peg.

This will reduce liquidity, unless the PBOC finds new loosening measures, among which, lower bank reserve requirements are expected this year.

But the danger lies in a possible a loss of confidence in the yuan, in which case new liquidity may just facilitate more capital outflows. Such a scenario would make it more likely that China would have to “go Swiss” and also let its currency loose.

China Opens Up Exchange to Foreign Investors: One from Column A, Please..(“A Shares”) blog update profiles latest news from China, where foreign investors will soon be able to trade shares listed on the mainland’s main stock exchange, the Shanghai Stock Exchange.

The Shanghai Hong Kong Connect, a program set to kick off in mid-October, will allow foreign investors to buy some 568 stocks in the Shanghai Stock Exchange through Hong Kong brokerage accounts, subject to an annual total quota of $48 billion.

The database includes a comprehensive directory of Hong Kong and Taiwan brokerdealers that are qualified to help guide foreign investors to this market.

Shenzhen Stock Exchange is expected to launch a similar program next year. As China’s domestic markets become more open, they could be included in major stock indexes, which would lead to billions of dollars in new cash from funds that track these benchmarks, according to UBS AG.

This isn’t the first time overseas investors are able to buy Chinese stocks. Many of the country’s major companies are listed in Hong Kong, where they trade as so-called H-shares. Investors could invest in A-shares, which trade on China’s domestic markets, by buying funds that had access to the market under a program that accounted for less than 2% of the Shanghai market’s free float.

The new program will let investors buy A-shares directly, giving them more flexibility in that market as well as access to many sectors and stocks—such as Chinese liquor manufacturers and makers of traditional medicine—that don’t trade in Hong Kong.

For the full story from the WSJ, please click here.