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China relaxes margin rules as share prices fall

Margin investors only need to deposit a small proportion of the value of their trade, generating bigger profits for a given amount of money put down -- but also bigger losses

China's securities regulator has relaxed rules on margin trading -- borrowed funds that fuelled a spectacular stock market rally -- after measures including an interest rate cut failed to stop equities falling. The China Securities Regulatory Commission (CSRC) removed some limits on investors' minimum deposit requirements, it said on its website late Wednesday. Margin investors only need to deposit a small proportion of the value of their trade, generating bigger profits for a given amount of money put down -- but also bigger losses. Authorities tightened rules on the practice in June in an attempt to curb enhanced market risks, but the move was among the triggers for the recent heavy falls in Chinese shares. Shanghai closed down more than five percent on Wednesday, resuming its downward trajectory after days of heightened volatility. "Margin trading is a double-edged sword. It had driven the market up quickly and the process of deleveraging also caused wild market swings," Zheshang securities analyst Zhang Yanbing told AFP. "However, now there are special circumstances and what's most needed is to reassure investors' minds to prevent further large sell-offs that could be triggered even by the slightest signs of disturbance," he said. When Shanghai peaked on June 12 it had risen more than 150 percent over the previous 12 months, partly fuelled by margin trading. The new rules let investors pay back losses in other ways than forced liquidation of their shares -- which could prevent a vicious cycle of falling prices triggering sales, pushing values down further. Investors whose market assets go below the 500,000 yuan ($80,000) minimum will also be allowed to carry on trading. Rules for brokerages were also relaxed, letting them lend more to clients for longer. "The new policy with more flexible margin trading rules can help stabilise the market. It's a buffer for nervous market sentiment," Qian Qimin, an analyst of Shenyin Wanguo Securities, told AFP. Also Wednesday the Shanghai and Shenzhen exchanges said they would lower securities transaction fees in a bid to head off the volatility, the official Xinhua news agency said. However, the changes did not immediately stimulate markets, with the benchmark Shanghai Composite Index dropping 1.83 percent Thursday morning, while the Shenzhen Composite Index, which tracks stocks on China's second exchange, was down 2.74 percent.