China will expand the business scope of foreign brokerage firms' joint ventures when the time is right, the chief securities regulator said on Thursday.
Shang Fulin, chairman of the China Securities Regulatory Commission, also said Beijing would keep encouraging qualified companies to sell shares on the domestic stock market to reduce their reliance on bank loans as a source of capital.
Increasing the supply of shares could put the brakes on a long rally in the Shanghai stock market, which has risen almost 400 percent since the start of last year.
Speaking at a forum in Beijing, Shang said China planned to increase the free float of shares of publicly traded companies. Although most companies have completed reforms to make previously non-tradeable shares tradeable, they are subject to lock-up periods and other restrictions that mean only a small proportion of the shares actually are traded on the market.
Shang did not provide details on how Beijing planned to increase the free float of shares, or whether it would let firms end their lock-up periods early. "Once the lock-up period passes, firms have the right to sell part of their shares as they see fit. But that's the companies' business," he told reporters.
Jiang Jianrong, analyst at Shenyin and Wanguo Securities, said the government would find it difficult to increase the supply of freely traded shares enough in the short term to have much impact on the market.
"I don't think the government will shorten the lock-up periods for shares, as that would hurt its credibility," she said. In another step that could tilt the supply-demand balance, Shang said China would expand the scope of the Qualified Foreign Institutional Investor (QFII) scheme.
China agreed in principle at trade talks with the United States in May to increase the size of the QFII programme, which allows selected foreign firms to buy Chinese stocks, to $30 billion from $10 billion.
At the same talks, which were led on the US side by Treasury Secretary Henry Paulson, China also promised to resume issuing licences by the end of 2007 for foreign securities firms to form joint ventures.
China's eight foreign brokerage JVs currently can only underwrite stocks and bonds, broker bonds and foreign-currency B shares, and trade bonds for their own accounts. They may not act as brokers for the red-hot domestic A-share market, with domestic brokerages reluctant to let foreign competitors encroach on their increasingly profitable turf.
Goldman Sachs, Morgan Stanley and UBS currently operate brokerage ventures in China, while several other foreign firms, including Credit Suisse, HSBC and Citigroup, are in talks with potential Chinese partners, industry sources have said.
Shang said he was keen to boost the size of China's underdeveloped 450 billion yuan ($60 billion) corporate bond market. His agency recently assumed responsibility for overseeing debt issues by listed companies with tenors of at least 1 year.
"We will try to expand the size and proportion of our bond market (within the overall financial market) in as short a time as possible," he said. Chinese firms raised 478 billion yuan on the domestic A-share market in the first nine months of the year, less than 10 percent of the newly extended bank loans in the same period, Shang said.
He said China would also steadily promote the development of derivatives and speed up the construction of a Nasdaq-style board for high-tech firms, but said nothing specific about the long-anticipated launch of stock index futures. The regulator also vowed to crack down on insider trading and other improper practices, to keep up with the increasing complexity of the markets.
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