China Implements Measures to Control Short Selling in Ongoing Efforts to Manage Stock Market Decline

China’s primary securities regulator has implemented new restrictions on short-selling in its ongoing efforts to mitigate a prolonged $6 trillion stock market decline that commenced in 2021. The China Securities Regulatory Commission declared on Sunday a comprehensive suspension of lending restricted shares on mainland bourses.

Effective Monday, these measures specifically impact shares held by company employees or strategic investors, which are restricted from trading in the stock market for a designated period but can still be lent to facilitate short-selling. Short sellers typically borrow shares from brokers, swiftly sell them, and aim to repurchase them at a lower price before returning the shares.

In addition to the suspension, the regulator instructed securities financing firms borrowing shares from institutional investors to wait one day before providing them to brokerages, which can then lend them to short-sellers. This marks a shift from the previous practice where these shares could be promptly provided to brokerage firms.

Although China had previously imposed limits on short-selling of shares held by strategic investors in October, the stock markets continued their downturn, leaving analysts skeptical about the effectiveness of these new measures.

Ken Cheung, Chief Asian Foreign Exchange Strategist for Mizuho Bank in Hong Kong, remarked that the mainland Chinese markets exhibited minimal reaction to this policy change. On Monday, the Shanghai Composite Index rose by 0.3%, while the Shenzhen Component Index decreased by 1.6%. Investor sentiment further soured as a Hong Kong court ordered Evergrande, a symbol of China’s property crisis, to liquidate.

Despite recent interventions, challenges persist. Over the past week, Chinese authorities intensified measures to counter the stock market decline, prompted by significant index drops the previous Monday, resulting in year-to-date losses ranging between 7% and 10%. Hong Kong’s Hang Seng Index rebounded by 4.2%, and the blue-chip Shanghai Shenzhen CSI300 saw a 2% weekly gain after unconventional interventions and announcements by concerned Chinese officials.

Bloomberg reported on Tuesday that Chinese authorities were contemplating instructing state-owned enterprises to utilize funds from offshore accounts to purchase shares worth up to 2 trillion yuan ($282 billion). Subsequently, regulators proposed assessing the performance of state-owned company heads based on their stock market value.

During an international financial conference in Hong Kong, Li Yunze, Director of the National Administration of Financial Regulation (NAFR), pledged to further open China’s $64 trillion financial industry to international investors. On the same day, Pan Gongsheng, Governor of the People’s Bank of China, unexpectedly announced a reduction in the amount of cash banks are required to hold as reserves, potentially injecting 1 trillion yuan ($141 billion) in long-term liquidity into the economy.