Closer Look: Stock Market Wasn't Burning Down, but CSRC Doused It Anyway
(Beijing) – The A-share market suffered its worst single-day drop in more than six years on January 19 following regulatory actions aimed at curbing trading with borrowed money.
The benchmark Shanghai Composite Index fell by 7.7 percent from the previous day, the worst decline since June 2008. The share price of many financial institutions, including banks and securities companies, fell by the daily trading limit of 10 percent.
The sell-off was widely seen to have been triggered by the China Securities Regulatory Commission's (CSRC) recent move to tighten margin-trading rules. On Friday January 16, it required three leading brokerage firms to stop opening new margin-trading accounts, as punishment for rolling over contracts against rules.
It also set the minimum capital an investor must have to open such an account at 500,000 yuan. Previously, securities firms were allowed to set the threshold themselves, and some set it at zero. The regulator did not say whether existing accounts with less than 500,000 yuan should be closed, prompting fears of further sell-offs.
Apparently surprised by the market's reaction, the regulator called a press conference on the evening of January 19 to announce that the rule would not affect existing margin-trading accounts. The CSRC had no intention of cooling the market, CSRC spokesman Deng Ge said.
The logic behind the move to tighten rules is simple. Much of the growth in the stock market over the past several months was driven not by improvements in the economic fundamentals, but by a surge in leveraged investments. Retail investors were pouring capital into the market, many apparently unaware of the risks. It is the CSRC's job to prevent risks from worsening.
But the message could have been sent to investors in a way that disturbed the market less.
For all the perils, the market was not facing immediate danger. It took more than three months for the outstanding value of all margin-trading accounts to reach 1.1 trillion yuan from only several hundred billion yuan. If the regulator wanted to curb margin trading, it could have done so slowly.
Defusing risk in the stock market is like evacuating a building full of people. Whether firemen should sound the alarm or tell everyone to exit in an orderly manner depends on the urgency of the threat and how well the people have been trained to respond to emergencies. If danger is not imminent and people lack training, sounding the alarm may not be the best choice because it could cause a panic.
The A-share market is like a building in danger that is filled with untrained people in that it has attracted many highly leveraged investments and many retail investors, who have probably taken on more risk than they should. It is difficult to predict their responses.
Whether margin trading requires regulatory intervention is another matter. The sector may not have been monitored as well as other financial activities, but its expansion has slowed as securities firms approached lending limits.
As for the threshold for opening a margin-trading account, some securities firms removed the requirement altogether after they were given the choice last April. If this is risky, the regulator should not have waited until now to take action.
By punishing the securities firms that violated the requirement, the CSRC has strengthened a rule that requires investors to settle their margin-trading contracts every six months. This is unwise because it discourages investors from seeking long-term returns rather than speculative gains.
(Rewritten by Wang Yuqian)
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