CSRC signals caution with punishments: experts

Bull market expected to keep running given govt's reform priorities

Stock prices in China's A-share market slumped sharply Monday, with the benchmark Shanghai Composite Index down 7.70 percent on the day, the biggest daily drop in more than six years. The decline was attributed to the securities regulator's decision to ban three brokerages from opening new margin-trading accounts. Authorities also reportedly punished nine other firms for allowing unqualified investors to trade stocks on credit. The Global Times interviewed three experts to get their views on the matter and conditions in the market.

Shao Yu, chief economist at Orient Securities

The reason for Monday's slump was the China Securities Regulatory Commission's (CSRC's) decision to reprimand several brokerages over irregularities in their margin trading operations.

Recent stock gains have overheated the market and led investors to overact to the CSRC's latest move. In fact, the commission's decision was based on findings made during a routine compliance inspection. It's natural that the CSRC would require offending securities companies to rectify their behavior.

The CSRC's real intention is not to suppress the stock market. The country needs a prosperous market to support reforms to State-owned enterprises (SOEs). Authorities have strengthened their supervision of margin trading to prevent excessive amounts of hot money from entering equities. This would only lead to tightened liquidity conditions in the real economy.

Looking ahead, the bull market will likely continue, just at a reduced pace. Of course, we can expect a return of volatile conditions once leveraging starts to run dry. There is also, as ever, the possibility of another "black swan" event rattling investors, as we saw Monday.

Li Mingliang, an analyst with Haitong Securities

The CSRC's decision to punish several brokerages wasn't the only factor behind the stock market drop.

First, retail investors panicked over rumors that market regulators will raise the threshold for margin trading. Currently, only investors with over 500,000 yuan ($80,457) in assets are allowed to open margin-trading accounts. Investors feared that upping this limit would cut off capital flows into the stock market. The resulting panic caused large numbers of investors to dump their shares.

Second, many investors felt that brokerage stocks had already risen too high, especially after gains seen in the second half of last year. This led to a sell-off in brokerage stocks.

Third, there is a possibility that short bets on the market by institutional investors are weighing on asset prices.

Monday's losses have taught both brokerages and individual investors a lesson. For securities firms, they must learn to pursue their business interests within a legal framework or risk being reprimanded. Investors must realize that they should only make investments based on their own experience and risk-taking capabilities - they must avoid blind investments with borrowed money.

The CSRC's punishment will have little effect on the profits of securities companies. Margin trading is still a small part of their business; and besides, most investors who are willing and able to trade stocks on credit have long since opened margin-trading accounts.

Looking ahead, the bullish market tone will not change in 2015. There will be some inevitable fluctuations, since the real economy is undergoing a difficult transformation and domestic GDP growth is slowing.

Cai Junyi, chief investment Consultant at Shanghai Securities

The CSRC's compliance inspection and subsequent punishments provided a convenient excuse to sell stocks Monday. In fact, the market has already realized that surging stock prices, combined with a rapid expansion in margin trading, cannot be sustained indefinitely. An adjustment will come sooner or later.

Saying that several regulatory departments have joined up to suppress the stock market is absurd. In the current environment, no one department would dare to suppress the market. The central government has a lot on its agenda now and is counting on an active stock market to deliver the capital and the trading opportunities needed to support a broad range of reforms.

It cannot be denied though that the CSRC's latest move has thrown cold water on the market. Punishments meted out to offending brokerages also provide a warning about being too lax on risk controls. Once stock option trading begins, brokerages will have to maintain high levels of stability and security.

Looking ahead, the stock market may continue to rise, but the growth momentum will ease. Central authorities will be pleased with such an outcome. The ongoing reform process is happening gradually, requiring steady support from the stock market. The feverish gains seen late last year are obviously at odds with the government's plans.

There are still numerous opportunities for investors to profit from the current market. Earnings season is coming up and listed companies with strong growth potential could make attractive investment targets. Companies in sectors that stand to benefit from top-level decision-making could also be worth considering.