Revised rules help securities houses
By Sun Ming (China Daily)
Updated: 2004-11-04 00:15

China released revised rules for securities houses using stock as loan collateral Thursday, widening financing channels for fund-thirsty securities businesses.

The revision removes some restrictions set in an old regulation adopted in 2000 and further clarifies terms and obligations involved in loan borrowing activities by securities houses that use stock as collateral.

The new regulation, which is effective today, was jointly issued by the People's Bank of China, the China Banking Regulatory Commission and the China Securities Regulatory Commission.

Compared to the earlier regulation, the new one allows more securities houses to acquire bank loans via the use of equity collateral. In the past, only those with comprehensive operational licences and a profit record over the past year were allowed to apply.

Meanwhile, convertible bonds issued by listed companies are for the first time allowed as a sort of security that can be used as collateral to receive bank loans. Previously, only A shares and securities investment funds could be used as pledges in such borrowing by such securities houses.

And the term for loans have also been increased from the previous maximum of six months to a year.

The amendment shows banks and securities companies clearer procedures and standards for the handling of loans with stock used as collateral, experts said.

It is easier to follow and the threshold has been lowered, which enables more securities companies to take part in the business and get funding, an analyst with Guotai & Jun'an Securities said.

Still, securities companies have to have certain qualifications to acquire such loans,like adequate asset liquidity, risk controls and information disclosure. They also have to submit sufficient deposits to prepare for trading risks and be clear of major irregularities over the past year.

The regulation also lists the types of stocks that cannot be used as collateral, including those of loss-making companies, stocks with big fluctuations in the past six months or those with heavy investments by securities houses.

China first allowed securities companies to use stock as collateral to receive bank loans in 2000. But since then, only a few big securities houses were able to acquire such loans, partly because of the high thresholds and complicated procedures. Banks were also often reluctant to offer the loans since the legal terms seemed quite vague and ratings of many securities firms did not look positive.

By the end of last year, only about 30 billion yuan (US$3.6 billion) in stock collateral loans were granted to securities companies in China.

The major problem with the securities houses is an irrational business structure and poor management, said Yi Xianrong, a Chinese Academy of Social Sciences researcher.

They should find new profit resources and build up credit, he said. Otherwise, even with the policy stimulus of the authorities, their performance may not see concrete improvements. Risk control is also a crucial part of the reform.

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