Gov't sets up stock protection reserve By Chen Hua (China Daily) Updated: 2005-09-30 08:48
China has announced that a stock investors' protection fund came into
operation yesterday, after three months of preparation work.
The news cheered up the market, with the Shanghai Composite Index surging 2.1
per cent to settle at 1155.48 points on turnover of 14.4 billion yuan (US$1.8
billion) in Shanghai and Shenzhen.
A company was established to take care of money in the new fund, which aims
to protect securities investors by offering them compensation in case of a
brokerage bankruptcy, closedown or regulatory takeover, according to market
watchdog China Securities Regulatory Commission (CSRC).
The fund is solely State-owned and its money will came from six sources:
stock trading commissions from the Shanghai and Shenzhen stock exchanges; the
brokerages; interest generated from subscriptions to share and bond issues;
liquidated assets from failed securities houses; donations and other legal
sources.
CSRC did not reveal the size of the fund, but late in June the central bank
said it had offered 10 billion yuan (US$1.2 billion) to the fund.
Meanwhile, the annual interest from the subscription fee was estimated to be
some 300 million yuan (US$36.2 million).
When a securities broker goes bankrupt or is taken over due to
irregularities, the fund will compensate traders.
After handing out compensation, the fund company will participate in the
liquidation of the failed companies as a creditor.
"This makes it efficient for us to compensate investors, in particular small
investors, and will minimize market unrest due to the bankruptcy of a
brokerage," a spokesman for the fund company said.
The fund is a vital tool, among others, to keep a stable stock market, said
Dong Chen, a senior analyst at CITIC Jianyin Securities.
As a financial institution, securities houses are very special because their
failure or bankruptcy can cause great losses to investors and thus create
serious market panic. The unrest on the securities market often spreads to other
financial sectors due to their close relation, and might lead to social
instability, which is what the government is concerned about most of all, the
analyst said.
Before the introduction of the fund, the government had to bail out a failed
brokerage because of the possible serious consequences, and also because almost
all of China's securities brokers were State-owned.
For example, when Southern Securities fell into financial trouble and was
taken over by the government at the start of last year, the central bank had to
lend it 8 billion yuan (US$967.4 million) in case its investors rushed to
withdraw their guaranteed funds.
When Xinhua Securities was closed down in December 2003, the central bank
lent it 1.5 billion yuan (US$181.4 million).
But investors should not depend on the fund to help them in all cases, said
Yi Qing, a veteran trader in Beijing.
The fund will not cover losses due to traders' poor trading decisions and
normal market risks, according to a circular concerning the protection fund
issued in late June by key State departments.
"Investors should be selective and choose credible brokers," Yi said. China
has 70 million securities investors.
The regulator also said the fund would be operated in a conservative way in
order to keep its money safe. It will be allowed to invest only in bank deposits
and bonds from the State, central bank and other high-level financial
corporations.
China's brokerage sector has been in great difficulties over the past four
years due to the sluggish market and many legal loopholes.
In 2004 alone, 13 brokerages were punished by CSRC due to their
irregularities. And so far about 20 securities companies, including former
market heavyweight China Southern Securities, have been closed down or taken
over because of embezzlement of clients' guaranteed funds.
(China Daily 09/30/2005 page9)
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