It's necessary and urgent to set up buffer funds to confront big speculators and stabilize the mainland market, a senior official said.

Jiang Lianhai, head of Jilin provincial securities regulatory bureau, published an article in Shanghai Securities News yesterday, which pointed to the necessities, functions and capital resources of launching a buffer fund. Later, an official from China Securities Regulatory Commission reiterated the view in an interview with China Daily.

In the article, titled "The capital market with Chinese characteristic calls for a buffer fund", Jiang said that in recent years, international hot money has flooded into China's stock market and real estate sectors. Some international speculators are planning to buy cheap stock when the market is sluggish and close out in a high price. "If the government does not have an effective tool in hand, it will be dangerous."

A buffer fund, or an intervention fund, is designed to stabilize an overheated or an unreasonably slumping capital market. It's a legal fund established by certain official organizations, such as securities watchdogs, finance departments and stock exchanges.

As for the capital of a buffer fund, Jiang pointed to four channels. The money can be collected from market players, with sums of about 150 billion to 200 billion yuan, the collected stamp tax from securities transactions, which is about 200 billion yuan annually. It can also be collected from a certain proportion of foreign exchange reserves and the cashed shares from non-tradable stocks.

So far, Hong Kong, Taiwan and Japan have used buffer funds to save their stock markets, and Hong Kong is regarded as the most successful of the three. In August 1998, the Hong Kong government used a HK$118.1 billion foreign exchange fund to fight speculation from George Soros and other heavyweights. The efforts lasted half a month and resulted in Hang Seng Index climbing to 7829 points from 6660 points. The buffer fund completed its mission of "saving the market" and in 2002, it had more than HK$110 billion profit.

"As a double-edged sword, if the buffer fund is properly designed and used in the right time and in a reasonable way, it can stabilize the market. If not, the effect will be the opposite," Jiang said.

He said he believes that launching a buffer fund is a big measure, and it is important that it is approached with caution when it is being designed.

Looking ahead, the mainland capital market could be helped with the implementation of short-selling mechanisms, market makers, margin trading and securities lending. Jiang believes it could develop more healthily.

(China Daily July 11, 2008)