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China Issues Rules to Widen Financing Channels for Stock Firms

Revised rules for securities houses that use stocks as loan collateral have been released, widening financing channels for fund-thirsty securities businesses.

The new regulation, which becomes effective Friday, was issued jointly by the People's Bank of China, the China Banking Regulatory Commission and the China Securities Regulatory Commission.

In contrast with the earlier regulation adopted in 2000, the new one allows more securities houses to acquire bank loans via the use of equity collateral. In the past, only those with comprehensive operational licenses and a profit record over the past year were allowed to apply.

Meanwhile, convertible bonds issued by listed companies are for the first time allowed as a sort of security that can be used as collateral to receive bank loans. Previously, only A shares and securities investment funds could be used as pledges in such borrowing.

And the term for loans have also been increased from the previous maximum of six months to a year.

Still, securities companies have to have prove certain qualifications to acquire such loans by exhibiting adequate asset liquidities, risk controls and information disclosures. They also have to submit sufficient deposits to cover trading risks and be clear of major irregularities over the past year.

The regulation also lists the types of stocks that cannot be used as collateral, including those of loss-making companies, stocks with big fluctuations in the past six months or those with heavy investments by securities houses.

China first allowed securities companies to use stock as collateral to receive bank loans in 2000. But since then, only a few big securities houses were able to get such loans, partly because of the high thresholds and complicated procedures. Banks were also often reluctant to offer the loans since legal terms seemed quite vague and ratings of many securities firms did not look positive.