Lifted by anticipation of Bank of China's (BOC) imminent listing on the domestic market as well as the securities regulator's introduction of margin trading China’s stock market closed on a 26-month high yesterday.

 

The benchmark Shanghai Composite Index surged 1.5 percent to close at 1,697.282 points reaching its highest level since mid-April 2004. The Shanghai Index has gained more than 10 percent in the past three weeks.

 

Bank shares were popular on Monday driven by expectation of BOC's July 5 domestic listing. The bank will raise 20 billion yuan (US$2.5 billion) in the country's largest-ever domestic initial public offering (IPO).

 

"BOC's shares have been widely predicted to rise at least 15 percent on the first trading day," said She Minhua, a banking analyst with CITIC China Securities. "The fact that BOC shares are being sold benefits the valuation of other banking shares."

 

Shares in Huaxia Bank Co Ltd yesterday leapt 7.1 percent to close at 4.83 yuan (60 US cents), while shares in the Shenzhen Development Bank, still in the process of stock reform, climbed 7.14 per cent to 8.1 yuan (US$1.01).

 

Yesterday's market was also buoyed by the security regulator's announcement that it would allow qualified brokerages to offer margin trading--an advanced trading tool which lets investors buy and sell with money and stocks borrowed from brokerages.

 

"Margin trading will begin on a trial basis from August 1," the China Securities Regulatory Commission (CSRC) said in a statement on Sunday.

 

"Even though the regulator is keeping this type of trading to a small-scale on a trial basis the news did send a positive signal about the government's determination to develop the stock market and that buoyed investor confidence," said Cheng Weiqing, an analyst with CITIC Securities. ?

 

"A batch of blue chip shares will rise steeply as they’ll be selected for the margin trading market," Cheng said.

 

Cheng believes that China will not slow down its progress with IPOs, particularly the larger offerings in the following months, as the new trading tool would draw increased capital to the market.

 

Brokerages with net capital of at least 1.2 billion yuan (US$150 million) over the past six months will be allowed to offer the services and investors must provide deposits as collateral, according to the CSRC statement.

 

Qualified securities firms must have been in the brokerage business for at least three years and have effective risk management, the statement said.

 

Leading domestic securities firms such as CITIC Securities and Hong Yuan Securities will be the biggest winners as trading will initially be confined to a small group of qualified brokerages.

 

"Those securities firms' revenue will certainly increase as margin trading will bring them new gains from trading fees as well as interest earnings," CITIC China Securities' She Minhua said.

 

Shares in CITIC Securities soared 8.59 percent to 17.20 yuan (US$2.15) yesterday. Shares in Xinjiang-based Hong Yuan Securities surged 4.92 percent to close at 9.38 yuan (US$1.17).

 

Analysts believe the regulator will release a series of detailed trading rules in the following week.

 

"China has studied for four years the feasibility of margin trading which is a mature trading system in developed countries," said Lu Lixin, a senior analyst with Beijing Securities.

 

"The introduction of the margin trading system, which acts as a lever to pull more capital into the market, will stimulate and deepen China's capital markets,” Lu said. “But on the other hand it’ll also magnify investors' potential risks due to lever impact," added Lu.

 

(China Daily July 4, 2006)