The A-share market suffered a correction last Friday after policy changes, including banning brokers from offering financing to investors through total return swaps, and investigation into several major Chinese brokerages were announced.
The regulators are trying to build a healthy market and the policy changes are not expected to change the natural rules of the market.
After the big fall last Friday, the Securities Association of China announced that the new rules will not affect existing return swap contracts. It also released data showing that as of Nov. 27, the outstanding amount of margin financing through return swaps was only about 78.5 billion yuan (US$12.3 billion), lower than the market estimate of 120 billion yuan.
Such contracts accounted for a very low proportion of the total transaction volume in November.
The brokers’ announcement was meant to prevent the market from becoming too concerned about the policy changes.
Meanwhile, the Chinese securities regulator also lifted the ban on brokerages from holding net selling positions in proprietary trading.
We should remember that although the administrative ban has been lifted, the brokers’ own promise, to maintain their present position while the Shanghai Composite Index is below 4,500, is still in effect.
In unveiling the new rules, the regulators wanted to promote the marketization of the A-share market and realize President Xi Jinping’s call to resolve financial risks, improve market regulation and protect investors’ interests.
The market fell last Friday because the new rules were over-explained and the market probably misunderstood the regulators’ intentions.
Also, the renminbi’s inclusion in the International Monetary Fund’s Special Drawing Rights basket is unlikely to lead to market volatility in the short term. It won’t affect the performance of the A-share market. The market needs more reasons to fuel its growth.
Meanwhile, global markets look well-prepared for the Fed rate hike this month.
Investors may accumulate more quality growth stocks amid the market turbulence. The real estate sector is worth watching. We prefer stocks with solid fundamentals.
This article appeared in the Hong Kong Economic Journal on Dec. 4.
Translation by Myssie You
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