(Bloomberg) — China will stop borrowing certain stocks for short selling starting Monday, the securities regulator said Sunday, in a bid to shore up the country's slumping stock markets.
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Strategic investors will not be allowed to lend shares during agreed lock-up periods, the Shanghai Stock Exchange and the Shenzhen Stock Exchange said in separate news releases following the China Securities Regulatory Commission's statement.
Read more: Why China is trying to curb short selling of stocks: QuickTake
“The move may have limited impact on market stabilization” as some estimates show that securities lending balance is of insignificant size, said Willer Chen, senior analyst at Forsyth Barr Asia Ltd. “Nevertheless, this is a good gesture for the market.” Participants had called for regulators to intervene on this front.”
While exchanges do not define strategic investors, they typically refer to restricted stock holders.
A stock gauge for onshore Chinese brokers underperformed on Monday, falling more than 1%. The broader CSI 300 benchmark fell 0.2%.
Authorities are taking action after an alarming decline in Chinese stocks – the MSCI China Index has lost 60% since its peak in February 2021. Last October, restrictions were placed on the loans of shares received by executives and other key employees in strategic placements, and other restrictions were imposed. Since then, the outstanding value of shares lent by strategic investors has fallen by 40%, the CSRC said on Sunday.
The MSCI China indicator posted its first weekly rise of the year last week, narrowing its 2024 loss to about 7% after the central bank announced an impending cut in the reserve requirement ratio and plans for targeted stimulus measures.
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Bloomberg previously reported that state-owned Citic Securities Co. stopped lending stocks to retail investors and increased requirements for institutional clients after regulators issued so-called “window guidance.”
However, limiting short selling is unlikely to provide a sustained boost to stocks as sentiment remains weak. In 2015, China restricted short selling to squeeze out day traders, whose sales and purchases on the same day were seen as causing “abnormal fluctuations.” However, the market continued to slide in the following months.
The CSRC also vowed on Sunday to crack down on circumvention of lockdown restrictions. Starting March 18, securities financing firms that borrow shares from institutional investors will have to wait a day before releasing them to brokers, instead of having the shares available immediately, Sunday's statement said.
Read more: As stocks plunge, China turns to its 'national team': QuickTake
“China's tightening of short selling will trigger a temporary boost in growth-oriented sectors such as new energy and electric vehicles, which are already supported by continued government support with relatively bright prospects,” said Hebe Chen, analyst at IG Markets. “However, this measure appears to be more of a short-term remedy given the lack of effective medicines to address the root causes that contributed to the recent stock market collapse.”
Ping AN Securities Co Ltd. said A-share securities lending balance was 70.5 billion yuan ($9.8 billion) as of Jan. 25, down 13% from the end of September 2023. The broker cited wind data.
– With support from April Ma, Ken Wang, Charlotte Yang, Ishika Mookerjee and Jiyeun Lee.
(Updates with Monday's market moves)
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