Trust companies and insurance firms have been given more flexibility to trade Chinese listed stocks, as part of regulatory moves to boost institutional participation in, and optimise the structure of, domestic capital markets.

This was confirmed by two circulars issued by China Securities Depository and Clearing Corporation (CSDCC) on Friday, which both came into effect that day.

One of the circulars enables trust companies to open securities accounts again after a hiatus of more than three years (since July 2009). It also means they will have a wider choice of investment advisers, including the segregated-account departments of fund-management firms and asset-management (AM) programmes under securities companies.

Trust companies launch private-placement fund products, on which hedge fund managers act as investment advisers. It was costly to issue new hedge fund products when trust firms were not allowed to open new securities accounts.

It normally costs a hedge fund manager a one-off charge of Rmb2 million to use a securities account at a trust company, but to save cost some hedge funds share one account, says a Shanghai-based hedge fund manager. “The new circular is going to drive down costs to a level similar to 2007 or 2008, when hedge fund managers only paid around 0.5% to 1% of management fees to trust companies.”  

Due to the high cost of securities accounts, he adds, it is hard for a hedge fund manager to make money if the fund size is below Rmb100 million. “This year, due to poor market conditions, fundraising has been difficult and many new funds’ AUM is just around Rmb50 million.”

However, due to the poor performance of A-shares, this deregulatory move is not likely to have a significant impact on hedge fund growth in the short term, he suggests. The Shanghai Composite Index has fallen 19% in the past year.

The other CSDCC circular allows insurance AM firms to open securities accounts for managing assets for non-insurance clients for the first time. Specific-client AM programmes and collective AM programmes must be kept as separate accounts, and accounts must be used within six months once opened.

One manager at a trust company says the regulator has chosen the timing to put forward the deregulation in order to attract more funds from institutional investors to revive the A-share market, which is now trading at a three-year low.

One aim is certainly to attract long-term capital into the stock market. The circulars note that both trust companies and insurance AM companies are banned from speculating in IPO subscription and 'special treatment' stocks – that is, companies that have made losses for more than two consecutive years.