China Shakes things Over the Weekend - What you Need to Know
This daily digest will focus on new developments in China’s foreign exchange policy, changes in financial market regulations, and broader economic coverage in order to keep the DailyFX reader up-to-date on news typically covered only in Chinese-language sources.
- The People’s Bank of China to set up a new committee focusing on asset securitization issues
- The PBOC also announced approval of RQFII quota in Malaysia.
- China cut the stock leverage; yet it has limited downside effects.
(China’s Central Bank)
- The central bank announced that the State Council has approved another pilot region, Malaysia, for the use of RQFII regime. The total quota of RQFII in Malaysia is 50 billion yuan.
RQFII is a program from the PBOC which allows “Qualified Foreign Institutional Investors” to purchase securities using the Chinese Yuan within mainland China. In doing so, it provides a channel for foreign investors to invest in Yuan-denominated assets. The expansion of RQFII into more countries shows that China continues to open up its financial markets.
- The People’s Bank of China has led the move to establish the China Inter-bank Market Dealers Association, also known as the Asset Securitization and Structured Finance Committee, in Beijing as of November, 20 2015. The committee aims to study the developed financial markets and learn from them in order to solve the issues which China encountered during the asset securitization process and to encourage innovations in the financial markets.
The 29 members of the Committee come from diverse backgrounds: regulators, banking, securities, funds, insurance, accounting, legal, tax and other areas. Also, the committee hired 7 consultants from PBOC, the Treasury, and foreign financial institutions. PBOC’s Deputy Governor Pan Gongsheng attended the opening meeting.
The establishment of the Committee is a major development in China’s financial markets. It signals that China is going to accelerate the progress in the asset securitization process. Traders will want to keep a close eye on any updates from this committee for potential policy changes.
(Chinese leading online media of financial news)
- A new rule at the Chinese stock market: from November 23, 2015, the maximum leverage of stock purchasing and selling is reduced from 2:1 to 1:1. The maximum leverage for purchasing and selling bonds remains the same at 2:1.
China’s stock market plunge through the 3rd quarter of this year was largely caused by the inappropriate use of leverage. Investors were able to borrow from unauthorized financial institutions with a margin of 25%--leverage of 4:1—or even lower, 10% (10:1). As Chinese stocks hit their limit for single-day losses on two consecutive days, many trading accounts were forced to close existing positions with no human interaction. These liquidations exacerbated market declines, and as a result the regulator is now closely monitoring trading leverage in the domestic stock market.
Normally, a cut in trading leverage might lead to decrease in trading volume. However, according to the data, the current average margin used by the stock investors is 280%,--far higher than the 100% required margin. Thus, the new rule of leverage cut should have limited downside effects to the stock market.
Written by Renee Mu, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.