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Borrowing banned on some Chinese stocks

Interactive Brokers restricts investors from buying certain Chinese stocks on margin.

The effects of the Sino-Forest controversy continue to be felt, this time by the active trading community. Last night Interactive Brokers, a popular online brokerage firm for traders, announced that it was stopping clients from borrowing money to buy shares of more than 130 Chinese companies.

IB’s Canadian executives wouldn’t comment on the move, saying they don’t discuss internal policies, but a release on the website says “elevated risk concerns” promoted the restriction.

While Sino-Forest isn’t on the list, five of the 132 companies banned from margin borrowing are TSX listed businesses. They include: Boyuan Construction Group, GLC Tech Life Corp., Hangfeng Evergreen Inc., Migao Corp. and Minco Silver Corp.

The move is meant to protect IB and its investors from getting caught holding rapidly declining stocks. If a company’s share price drops quickly, IB could have a hard time getting its loans repaid and may have to take control of an investors assets.

It’s likely no coincidence that IB is doing this just days after Sino-Forest was accused by little known investment firm Muddy Waters of fraud, but it’s not the first time the company has taken action against businesses formed via the controversial “reverse merger”. A release in April includes a large list of companies that faced margin restrictions, due, again, to increased risk concerns.