China resumes securities market reforms

It took the detaining of brokerage executives, the shutting down of the futures markets and a clamp down on algorithmic trading to make the Chinese government comfortable enough to resume securities market reforms

Six months after the summer stock market rout, it looks like regulators might be ready to pick up where they left off when the market crashed. Among the positive signs, two foreign banks are close to getting securities licenses, there’s talk of creating a new exchange in Shanghai for technology startups, and legislative approval for a more flexible system of approving initial public offerings could come as soon as this month, reported Bloomberg.

With the Shanghai Stock Exchange Composite Index up 20% from its August low, officials feel more secure about resuming the reform agenda. On Thursday, the benchmark rose 1.8% to 3,580.

Meanwhile, concerns about a ballooning debt burden are prodding China’s reformers to allow greater access for foreign securities firms and to speed up plans to make the IPO market more efficient, providing relief to capital-hungry companies, said Bloomberg.

“The government is back to pushing for reform in the capital market after the 
efforts were sidetracked by the market rout,” Scott Hong, a Hong Kong-based analyst at CIMB Securities Ltd., told Bloomberg. “For next year, we can expect the start of IPO registration system and more opening of the securities industry to foreign players.”

The big difference from the reform push before the crash in that authorities now look down upon leveraged investing and short selling. The unwinding of leveraged stock purchases was a real reason for the turbulence and short-sellers were an easy scapegoat for regulators who unintentionally started the sell-off by restricting margin purchases. Initially, the Chinese regulators were fine with investors buying on margin to fuel the rally. Investors borrowed a peak of more than 2 trillion yuan ($310 billion) in June inflating the stock bubble to its breaking points. China’s regulators have now cracked down, banning online lending for stock purchases and imposing tougher margin requirements on loans from brokerages.

In addition, the market for initial public offerings was shut down in the wake of the summer rout. However, IPOs have resumed. And China plans to end the cumbersome process under which the China Securities Regulatory Commission pre-approves terms of all IPOs, and shift to a simpler and faster registration system, reported Bloomberg. The State Council, China’s cabinet, will seek approval from the nation’s top legislature this month to roll out the new system, the official Xinhua News Agency reported Dec. 14, indicating that the new regime could be in place early in 2016.



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