New Stock Exchange Rules to Take Effect in July

China's newly promulgated Stock Exchange Trading Rules will take effect on 1 July this year. They are seen as measures to restore the real order of the market. First, they will further strengthen the regulatory function of the stock exchanges. Second, they have abolished certain legal restrictions, thus paving the way for future reform.

The new rules are the result of a revision in line with the Securities Law. They mainly cover bond repurchases, cash and bond financing, price fluctuation limits, block trading, system of primary dealers, a differentiated trading mechanism catered to different demands, suspension of abnormal trading, and the monitoring of trading activities.

According to the China Securities Regulatory Commission (CSRC), the differentiated trading system will change the market structure of A shares as well as the flow of funds.

The new rules will do away with some of the existing trading restrictions, such as those on "spot trading", "centralised trading at competing prices" and "day trading" to cope with market development and further activate the market. They pave the way for the introduction of the "T + 0" system and cash and bond financing.

The relevant provisions of the Special Regulations for SME Board Trading have been incorporated into the amended Trading Rules. Rules on centralised competition for closing price will be open as in the main board. Compared with the Detailed Implementation Rules of the Shenzhen Stock Exchange on Block Trading issued in 2002, the new rules feature major amendments in block trading time and trading price. The further clarification of the regulatory functions of the stock exchanges will contribute to the healthy operation of the market based on the principles of fairness, openness and justice.

The new rules also cover the trading of warrants, stipulating that bonds and warrants may be resold on the same day, while B shares can only be resold on the following trading day. Other types of products approved by CSRC are also on the list, thus leaving room for the creation of new derivatives. The rules also stipulate that members of stock exchanges must adhere to relevant provisions when providing cash and bond financing service to clients in the buying and selling of securities. This is welcomed by the industry as it makes cash and bond financing possible.

The new rules give the stock exchanges more rights in initial public offerings. They also give stock exchanges the power to suspend the trading of shares and close-end funds in the event of abnormal fluctuations due to special circumstances.

Another right of stock exchanges lies in the monitoring of securities transactions. The stock exchanges will be closely monitoring 13 types of abnormalities in trading price or trading volumes.

The new rules will take effect on 1 July as suggested in the second draft for comments of the Measures for the Administration of Risk Control Indicators of Securities Companies. A new market system will take shape that day as new trading rules, refinancing measures, new IPO methods and new measures for administration of securities dealers all go into force.