Day Traders Are Still Not Welcome In China

BEIJING (TheStreet) -- China's central bank Tuesday effectively put the kibosh on hopes for a revival of same-day stock trading on the Shanghai and Shenzhen markets.

It looked like day trading, common in the 1990s but banned since 2001, would be coming back after the China Securities Regulatory Commission eased equities market rules in December.

The commission gave a green light to same-day trading of gold exchange traded funds, bond ETFs and money market funds by institutional investors on the Shenzhen exchange. Some saw the move as a step toward full-blown day trading, which in China is called "T+0."

But in its annual China Financial Stability Report released Tuesday, the People's Bank of China declared day trading too risky for mainland retail investors. The central bank's guidance is almost certain to be followed by securities regulators who supervise the exchanges.

China's stock markets are still "emerging and in transition," the central bank said. Thus, they're not ready for the volatility, speculative behavior and other risks to small investors that mature stock exchanges elsewhere in the world have learned to handle, the report said.

The report underscored Beijing financial regulators' lack of faith in domestic securities brokers, saying some would put, "The drive for profits, big deals and commissions" ahead of day traders' interests. And brokers would likely compound these risks by promoting margin trading, it said.

Day trading can also increase market volatility to levels that endanger market stability, the report said. Moreover, day trading was said to encourage stock price manipulation.

"The T+0 trade is likely to be used for insider trading, market manipulation and other violations of securities laws," the report said. "The potential risks of T+0 trading should not be ignored."

Indeed, in the 1990s, market regulators were dogged by day traders engaging in wild price speculation and insider deals. Regulators tried several control mechanisms before eventually giving up and barring day trading altogether. Today, the shortest period for flipping a stock is one day, or T+1.

Day trading is, however, permitted on the Hong Kong Stock Exchange, which is technically a Chinese institution but regulated by Hong Kong, not mainland, authorities.

That means mainland investors soon could be day trading in Hong Kong, since the Shanghai and Hong Kong stock exchanges recently started cooperating on a plan for cross-border investing. The system could launch as early as October.

Coincidentally also on Tuesday, the Shanghai Stock Exchange released proposed rules for mainlanders who in the future could be allowed to trade in Hong Kong through the cross-border scheme. The rulebook says day trading Hong Kong stocks would be allowed.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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