China lifts restriction on broker share sales

China has scrapped a five-month rule requiring brokerages to hold daily net long positions in their proprietary trading accounts as the country's shares continue to stabilise.

China has scrapped a five-month rule requiring brokerages to hold daily net long positions in their proprietary trading accounts, according to an official document seen by FinanceAsia, providing further proof that the country’s stock markets are stabilising.

As part of its efforts to stem the sharp summer selloff in shares, the China Securities Regulatory Commission imposed a curb on domestic brokerages, requiring them to buy more shares than they sold in their daily proprietary trading. Such restrictions were part of the so-called national team’s extraordinary measures to help prop up the sagging market, including a four-month freeze on initial public offerings

The cancellation this week is the latest sign that the country is putting the summer’s market scares behind it, with the benchmark Shanghai Composite Index now up more than 20% from its August lows at a little over 3,600 points.

“As the market has gradually stabilized, we’ve decided to remove the requirement so as to fully resume the market’s self-adjustment mechanism and resume routine oversight of securities institutions,” the CSRC said in an internal document entitled Notice No. 83 of 2015.

The securities watchdog didn’t immediately respond to a faxed request for comment.

The share prices of a number of Chinese brokers advanced on Tuesday, with Northeast Securities, Founder Securities, and Everbright Securities among the top gainers. Each gained 8.9%, 4.3% and 3.9%, respectively.

At the height of the market chaos in early July, 21 of China’s biggest securities firms pledged to jointly invest Rmb120 billion ($19 billion) in a fund to help steady volatile Chinese markets after shares plunged by nearly 30% in three weeks.

They also vowed not to sell off their proprietary investments, while agreeing to buy more shares at an appropriate time, as long as the benchmark Shanghai Composite Index traded below 4,500 points.

Taking a hit

The ban has since hit the proprietary trading books of China's brokers as well as their overall income. Eighteen of China’s biggest listed brokers saw a substantial contraction in their net profit and revenue in July, down 44% and 50% month-on-month, according to financial data provider Wind Information.

According to an estimate by China Merchant Securities, a large mainland broker, income from these proprietary businesses will halve in the second half of 2015 due to investment restrictions, having accounted for about 30% of brokerage income in the first half.

“You cannot really count on the brokers not to sell shares [in their proprietary trading] to hold up the market forever,” Hong Hao, chief strategist at Bocom International, told FinanceAsia.

“Lifting the ban now [rather than waiting for the index to rise further] shows the government’s recognition of the [improved] market [conditions] as the volatility declines and liquidity improves,” he said.

Another sign that such recognition is slowly forthcoming came earlier this month when the CSRC lifted a ban on new listings, enabling a first batch of 10 companies given prior clearance to go public this month. The regulator has also started examining the applications of nearly 700 companies that are queued in the IPO pipeline.  

According to some other market insiders, another reason restrictions on brokerage proprietary trading have been scrapped is because a separate six-month curb imposed on major shareholders comes to an end in early January.

The Chinese government in early July prohibited shareholders with company stakes of more than 5% from selling their shares for six months in a bid to arrest the market plunge.

“There is no sign that the government will renew that ban. It won’t make sense if big shareholders can sell stakes from January, while market participants like brokers are not allowed,” a Beijing-based fund manager at Citic Securities told FinanceAsia.

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