China's stock market closed at a 26-month high yesterday, boosted by anticipation of Bank of China's(BOC) imminent listing on the domestic bourse as well as the securities regulator's introduction of margin trading.

Investors watch market movements at a stock exchange in Fuyang, Anhui Province yesterday.  China's stock market closed at a 26-month high yesterday, boosted by anticipation of Bank of China's  imminent listing on the domestic bourse as well as the securities regulator's introduction of margin trading.[China Daily]

The benchmark Shanghai Composite Index surged 1.5 per cent to close at 1,697.282 points, reaching its highest level since mid-April 2004. The Shanghai index has gained more than 10 per cent in the past three weeks.

Bank shares enjoyed great popularity on Monday, driven by expectation of BOC's July 5 domestic listing. The bank will raise 20 billion yuan(US$2.5 billion) in the country's largest-ever domestic initial public offering(IPO).

"BOC's shares have been widely predicted to rise at least 15 per cent on the first trading day," She Minhua, a banking analyst with CITIC China Securities, said."The fact that BOC shares will go high benefits the valuation of other banking shares."

Shares in Huaxia Bank Co Ltd yesterday surged 7.1 per cent to close at 4.83 yuan(60 US cents), while shares in the Shenzhen Development Bank, still in the process of stock reform, climbed 7.14 per cent to 8.1 yuan(US$1.01).

Yesterday's market was also buoyed by the security regulator's announcement it would allow qualified brokerages to offer margin trading, an advanced trading tool that lets investors buy and sell with money and stocks borrowed from brokerages.

"Margin trading will begin on a trial basis from August 1," the China Securities Regulatory Commission(CSRC) said in a statement on Sunday.

"Even though the regulator is keeping margin trading to a small-scale trial basis, the news did send a positive signal about the government's determination to develop the stock market, and that buoyed investor confidence," Cheng Weiqing, an analyst with CITIC Securities, said.

"A batch of blue chips shares will go high since those shares will be selected to trade in margin trading," Cheng said.

Cheng believed that China would not slow down its steps with IPOs, in particular large ones in the following months, since the new trading tool would draw more capital to the market.

Brokerages with net capital of at least 1.2 billion yuan (US$150 million) over the past six months will be allowed to offer the services, and investors must provide deposits as collateral, according to the CSRC statement.

Qualified securities firms must have been in the brokerage business for three years and have effective risk management, it said.

Leading domestic securities firms such as CITIC Securities and Hong Yuan Securities will be the biggest winners as trading will initially be confined to a small group of qualified brokerages.

"Those securities firms' revenue will certainly increase as margin trading will bring them new gains from trading fees as well as interest earnings," CITIC China Securities' She Minhua said.

Shares in CITIC Securities soared 8.59 per cent to 17.20 yuan (US$2.15) yesterday. Shares in Xinjiang-based Hong Yuan Securities surged 4.92 per cent to close at 9.38 yuan (US$1.17).

Analysts believed the regulator would release a series of detailed trading rules in the following week.

"China has studied for four years the feasibility of margin trading, which has been a mature trading system in developed countries," Lu Lixin, a senior analyst with Beijing Securities, said.

"The introduction of the margin trading system, which acts as a lever to pull more capital into the market, will stimulate and deepen China's capital markets; but on the other hand, it will also magnify investors' potential risks due to a lever impact," Lu said.

Editor: Yan