China Regulator tightens Control over Lending to Small Stock Investors

China’s securities regulator is tightening on Friday control over lending to small stock investors in an attempt to cool an overheated stock market.

The China Securities Regulatory Commission has banned a type of financing called an umbrella trust, tightened control over other financing and told brokerages to limit potential risks, the commission said in a statement Friday.

The statement cited comments by the commission’s deputy chairman, Zhang Yujun, to a gathering of brokerage executives.

Zhang was cited as saying the commission plans to intensify inspection and law enforcement efforts.

Chinese stocks have surged. The Shanghai A share market, which is only open to Chinese investors, has almost doubled in the last year. Chinese investors have piled into stocks now that the property market is weakening and interest rates are falling. Tighter control over lending might reflect concerns that investors are taking on too much risk.

“The government is concerned that rising levels of leverage have added to the frothiness in stock prices,” said Eswar Prasad, professor of trade policy at Cornell University. “So any moves to restrict this leverage will send a strong cautionary signal to retail investors.”

Still, Prasad doubts that regulators will succeed in keeping Chinese retail investors away from stocks. He says there’s a lack of savings and investment alternatives in China.

Xavier Smith, who manages international stocks for asset manager Centre Funds and invests in Chinese stocks, said he welcomed the announcement because it would help make China’s stock market safer.

“We’ve had these rules in the U.S. for a long time,” Smith said. “It’s just the Chinese market trying to become more Western,” he said.

When investors can borrow large amounts of money to buy stocks, they can help push a rising market higher. But things can go badly if stocks start to fall: Investors face pressure to sell stocks to repay the loans, potentially turning a market drop into a rout.

Source: The Associated Press