950809

China cracks down

on fledgling

repurchase market

SHANGHAI: China announced a crackdown on Wednesday on its fledgling repurchase agreements market, a haven for hot money since treasury bill futures were banned in May.

Exchanges have been barred from trading repurchase agreements, or repos, without central government approval under new rules published in official newspapers.

Only licenced financial institutions can deal in repos. Individuals are barred from the market, according to the rules from the People's Bank of China, Ministry of Finance and China Securities Regulatory Commission.

Funds raised in the repurchase market cannot be used for investment in fixed assets, futures and capital markets, nor can they be extended as credit to enterprises.

Zhou Jie, head of the research department at China International Futures (Shanghai) Co, said the repo market had burst into life as a result of the T-bill futures ban, which was introduced after a Shanghai trading scandal.

Dealers have been selling T-bills on the repo market to raise funds to speculate in other financial instruments, Zhou said.

"Many institutions, brokerages and individuals took part in the repurchase business to raise money to speculate in the stock market and in futures," he said.

In a repurchase agreement a dealer sells securities, usually treasury bills, to an investor and agrees to buy them back at a fixed date and price. The difference between the sale and repurchase price represents the interest payable on what is essentially a loan.

Zhou said interest rates for the key seven-day repo reached a high of 17 percent in May. They are now at around 12 percent, compared with bank rates on one-year fixed deposits of 10.98 percent, but Zhou said the gap still threatens Beijing's control over interest rates.

Repos are most actively traded on the Shanghai Stock Exchange and the Wuhan securities market.

Average daily repo turnover in Shanghai, where the market was virtually dormant until one year ago, was 299 million yuan ($36 million) for the first five months of this year but jumped to 620 million ($74.6 million) in June and has remained roughly at that level, exchange figures show.

On one day in July, turnover exceeded one billion yuan ($120.5 million).

"Securities authorities are apparently concerned at the possibility of losing control of this form of treasury bill trading," said Li Jing, a bond trader with Shanghai Shenyin Securities.

Another bond trader, who declined to be named, said: "Beijing wants to nip in the bud any irregularities after the T-bill futures scandal".

The move to cool the repo market initially hit confidence in the Shanghai domestic A share market, which dropped at the opening on Wednesday before recovering to close 4.075 points higher at 741.774.

The rules say repos can only be offered in T-bills and financial bonds approved by the People's Bank of China.

All repos must be registered before August 30 with provincial branches of the People's Bank of China. Institutions that fail to register their holdings will be banned from trading the instruments.-Rueter