China to take steps to stabilise market

China’s securities regulator said the government will unveil measures to stabilise the country's markets, while exhorting banks to avoid “excessive” financial innovation.

The US credit crisis “poses grave challenges to China” yet the country’s economy is functioning well, Shang Fulin, chairman of the China Securities Regulatory Commission, said at a Beijing conference today.

“We must pay attention to the risks involved when we pursue financial innovations,” Shang said. “China will study the links between innovation and risks from the financial crisis and the fundamental reason that caused the crisis.”

Shang is trying to prevent the rout in the global equity markets from adding more pressure on China’s benchmark CSI 300 stock index, which plummeted 66 per cent this year as Asia’s worst-performer. The Chinese central bank cut interest rates twice, following measures by Asian, European and US monetary authorities to inject cash and provide liquidity to keep their financial systems running.

Vice Premier Wang Qishan said the government will use a wider array of measures to ensure stability of the capital market as well as the economy, the official Xinhua News Agency reported on October 14. The government will ban cross-border fund flows, push publicly-traded companies to return more money to investors and toughen rules to punish insider trading, Shang said on Friday.

Coordination Needed: “A lack of transparency on information made investors lose confidence,” Michel Prada, chairman of France's market regulator Autorite des Marches Financiers, said at the same conference today. “Regulators should enhance cooperation and consider supervising debt and structured products.”

The People's Bank of China cut interest rates on October 8 at the same time as a coordinated reduction by the US Federal Reserve and five other central banks aimed at easing the global credit freeze.

China's cabinet has already approved a plan to let investors buy shares on credit and sell borrowed stocks to help develop the domestic market — this at a time when regulators in the US, Europe and Australia have banned short selling to calm volatility.

China's stock exchanges have told eleven domestic brokerages they can take part in a 12-hour simulation of margin trading and short selling on October 25, the state-run Shanghai Securities News reported Friday, citing unidentified brokerage sources.

The report said two listed brokerages, Citic Securities Co and Haitong Securities Co, are among the 11 approved for the mock trading session. The unlisted firms include Everbright Securities Co and Guotai Junan Securities Co.

Brokers may earn 6.6 billion yuan ($966 million) in 2009 interest income from margin trading and short selling, the Shanghai Securities Journal said on October 6, citing an estimate by Haitong Securities Co.

Chins has also scrapped its tax on stock purchases and relaxed company buyback rules to help support the world's worst- performing major stock gauge this year. As the economy slows, corporate earnings and bad debts are expected to worsen.