China weighs curbs on stock speculation to foster steady gains

[BEIJING] China’s financial regulators are considering a number of cooling measures for the stock market as they grow concerned about the speed of a US$1.2 trillion rally since the start of August, sources familiar with the matter said.

The measures proposed to top policymakers in recent weeks include the removal of some short-selling curbs, the sources said, asking not to be identified as the information is private. Authorities are also contemplating options to rein in speculative trading on concern that a sharp reversal might inflict heavy losses on retail investors.

With an epic boom and bust from 2015 not forgotten, officials are seeking to cultivate steadier gains that will help revive the economy and consumer sentiment. The deliberations also coincided with China’s push to show off its military might at a Sep 3 parade to commemorate the 80th anniversary of the end of World War II. The government often seeks to instil stability in its capital markets around major national events.

China Securities Regulatory Commission (CSRC) chairman Wu Qing signalled determination to ensure stock market stability at a symposium he convened in Beijing at the end of last month, pledging to consolidate the “positive momentum” of the market, while promoting “long-term, value, and rational investing”.

It’s unclear if any of the measures will be approved or adopted, said the sources. The CSRC did not immediately reply to a faxed request for a comment.

China’s stock market has staged a remarkable comeback since April, with major indexes gaining more than 20 per cent. The Shanghai Composite Index hit a decade-high and the CSI 300 Index has surged more than 20 per cent from this year’s low.

While the indexes have lagged other global benchmarks for the year, there are signs of froth in China’s US$12.5 trillion market that have some parallels to 2015. That painful memory, coupled with China’s economic strains and US tariff threats, give authorities all the more reason to take a cautious approach in engineering a sustainable run without spooking investors.

Regulators have already drafted the nation’s financial institutions to help achieve that goal. Banks were asked to investigate the illicit use of credit funds in stocks after regulators’ monitoring found some investors have piled in with money borrowed from online credit platforms, according to sources familiar with the matter.

Brokerages were ordered to refrain from aggressively touting their round-the-clock services to help open new stock accounts, said the sources. Flocking to the market, retail investors opened 166 per cent more new accounts in August than the same month last year, according to exchange data.

Even social media platforms were alerted not to overly publicise content such as the bull market, margin transactions hitting a new high and increasing reallocation of bank deposits into stocks, to avoid stirring up novice investors, sources with knowledge of the matter said. Any violations and illegal stock recommendations will be severely punished, they said.

China’s ubiquitous WeChat app pledged to restrict traffic or ban certain accounts after some were found to have illegally offered stock recommendation services or lured users with fabricated and misleading information, according to a late August statement.

Over 400 mutual fund products have either announced a halt or cap in subscriptions in August, local media have reported.

Trading volumes on mainland exchanges hit more than 3.1 trillion yuan on Aug 27, the second highest ever, while margin transactions have reached record levels, surpassing 2015. Much of the run is liquidity-driven and defying China’s economic fundamentals from entrenched deflation to a persistent property crisis, triggering bubble warnings from market watchers.

Some financial firms have moved to cut the leverage for margin traders, who sent stocks soaring in 2015 before a clampdown on such activities triggered a crash. In the first such public move, Shanghai-based Sinolink Securities raised its margin deposit ratio on new client financing contracts for some securities to 100 per cent from 80 per cent starting Aug 27.

For now, regulators might still have some buffer room before they take any actions to intervene, as some argue the recent run is not retail-driven like in the 2015 round.

Citic Securities, one of the nation’s top brokerages, said smart money, such as high-net-worth individuals or corporate investors, have piled in via hedge funds, constituting the main drivers of stock gains. The rally so far also appears to be limited to some strategic sectors such as chips rather than broad-based, analysts led by Qiu Xiang wrote in an Aug 25 note.

“The probabilities for the current rally to be short-lived after a quick acceleration or broaden out are both low,” they wrote.

New A-share account openings in August still significantly lag behind a previous high in October, when China’s pro-growth policies ushered in 6.8 million new investors, marking the third-strongest month on record.

There’s no sign of a retail fund influx yet, but the market might be nearing a point where we will see some household savings pouring in, Western Securities analyst Cao Liulong wrote in an Aug 24 report. The market may then consolidate for around two to three months, before resuming the rally on the back of continuous inflows from savers and other investors, he said. BLOOMBERG