China restricts short selling in latest attempt to stem stock

China restricts short selling in latest attempt to stem stock market decline

Hong Kong CNN –

China's top securities regulator has restricted short selling in its latest attempt to stem a protracted $6 trillion stock market crash that began in 2021.

China's securities regulator said on Sunday it would “completely” suspend the lending of restricted shares on exchanges in mainland China.

The restrictions, which came into effect on Monday, affect stocks held by company employees or strategic investors and are prohibited from trading held on the stock market for a certain period of time, but can still be loaned out to others for short selling.

Short sellers borrow shares from a broker and then sell them quickly in the hopes of being able to buy them back later at a lower price before they have to return the shares.

The regulator also asked securities financing firms that borrow shares from institutional investors to wait a day before passing them on to brokers who can then lend them to short sellers. Previously, these shares could be made immediately available to brokerage firms.

China had already introduced some restrictions on short selling of shares by strategic investors in October, but stock markets continued their collapse – and analysts fear the new moves will also fail.

“The [mainland Chinese] Markets were largely muted in their reaction to this policy change,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

On Monday, the Shanghai Composite Index rose 0.3% while the Shenzhen Component Index fell 1.6%. Investor sentiment has also worsened after a Hong Kong court ordered the liquidation of Evergrande, the poster child of China's real estate crisis.

“The liquidation will at least remind investors of China's real estate downturn and may deter foreign investors from investing in China again for the time being,” Cheung said.

The Shenzhen Stock Exchange is the second largest in China after Shanghai.

Calm is returning, but the challenges remain

The Chinese authorities increased their measures to contain the stock market crisis last week.

The main market indices collapsed last Monday, bringing year-to-date losses to between 7% and 10%.

Following a series of unusual interventions and announcements from concerned Chinese officials, Hong Kong's Hang Seng Index (HSI) rallied, rising 4.2% last week, while the blue-chip Shanghai Shenzhen CSI300 posted a weekly gain of 2%.

Last Tuesday, Bloomberg reported that Chinese authorities are considering ordering state-owned companies to use funds held in offshore accounts to buy up to 2 trillion yuan ($282 billion) worth of stocks.

A day later, in an unprecedented move, regulators announced they were considering evaluating the performance of state-owned company leaders based on their stock market value.

On the same day, at an international financial conference in Hong Kong, Li Yunze, director of the recently established National Administration of Financial Regulation (NAFR), pledged to further open China's $64 trillion financial industry to international investors.

Hours later on Wednesday, Pan Gongsheng, governor of the People's Bank of China, unexpectedly announced that the central bank would cut the amount of cash that banks must hold as reserves, providing a trillion yuan ($141 billion) in the long term could become liquidity for the economy.