Top Biz News

More brokers may get to promote covered warrants

By Leo Zhang (Shanghai Daily)
Updated: 2006-09-11 08:53

With China's first warrants in a decade ending trade worthless amid rampant speculation, stock market authorities are striving to boost supply by allowing a bigger pool of brokers to issue more of such derivatives.

The Shanghai Stock Exchange, China's bigger stockmarket, has proposed in its latest report on Friday to allow brokerages to promote covered warrants, which are warrants based on any listed firms' shares.

Currently, brokers can only promote or scrap the same warrants as those already issued by big shareholders at public firms, leaving them with few choices in tapping the market.

Meanwhile, the new incentives may include expanding the business, now restricted to 15 first-tier domestic brokers, to several second-tier companies, the report, issued by the bourse's chief researcher Liu Ti, said.

"Covered warrants will become our development focus," said Liu. "The market should not only have warrants launched by stock holders of publicly traded firms but also those unveiled freely by brokers as well to help in fixing prices more efficiently and spur trading."

Industry sources have told Shanghai Daily that authorities may grant licenses to its first-tier brokers as early as late September to sell covered warrants based on the SSE 50 exchange-traded fund, which invests in the biggest 50 companies listed in Shanghai.

"Allowing brokers to launch covered warrants will significantly boost supply," said Zhu Huacheng, a warrant analyst at Xiangcai Securities Co. "It may effectively help curb the current speculative sentiment."

China reintroduced warrants into its capital markets in August last year after a 10-year absence due to trading improprieties and scandals as it pursues a program to dispose large chunks of nontradable state shares at listed firms to public investors.

Major shareholders at public companies can offer free warrants to minority investors to compensate for losses linked to the sale of their share ownership that may dampen prices of existing stocks.

Since then, scores of publicly traded firms have pressed ahead with warrants, which convey the right on investors to either buy or sell stocks at pre-determined prices during a specific time period.

But, irregularities resurfaced due to a limited supply of warrants, whose combined market value accounted for less than 1 percent of equities traded domestically. However, their cumulative trading volume was often seen to make up for more than a third of the total daily turnover in the Shanghai and Shenzhen stock markets last fall.

Unlike stocks, warrants in China can be bought and sold an unlimited number of times in one day, contributing to volatility. On November 15, warrants of Baoshan Iron & Steel Co, China's first such derivative since 1995, slumped 26 percent in seven minutes and rebounded to their previous level in the next seven minutes.

Several brokerages paid fines or were suspended for a week from brokering in warrants last November and last month after they were found to have been involved in misconduct such as funding clients' investments in Baoshan Steel's warrants.

The steelmaker's warrants slumped 86 percent on August 23 to close its one-year trading at 0.031 yuan, extending a loss to 94.5 percent in its last six trading sessions. But even the last-minute sharp drops couldn't have profited warrant holders if they had chosen to exercise the options.

Baoshan Steel's shares traded at 4.14 yuan each on August 30, the only day investors with the warrants could choose to buy the steel company's shares at 4.20 yuan apiece, meaning the derivative was virtually worthless. Its share price further dropped to 4.07 yuan as of Friday.

"We should admit that a weak supply-and-demand mechanism stoked some speculation in Baoshan Steel's warrants," said Liu Xiaodong, deputy general manager at the SSE. "But we can't regard the derivative as worthless as it infuses the market with new blood and boosts our ability to manage risks."

Liu also dismissed worries a growing warrant market may siphon funds from existing shares, and noted that active trading of certain warrants could actually lift the performance their underlying shares over the long term.

Warrants of China Vanke Co, which became the country's second after Baoshan Steel to halt trading on August 28, closed at 0.001 yuan, the lowest value they could have, with turnover rate soaring to 547 percent that day. Vanke warrants' holders would have lost more than 3 yuan per share if they had chosen to exercise a single piece of the derivative.