In an effort to stabilize its faltering stock market ahead of a crucial economic policy meeting, China has unveiled stringent measures targeting short selling and quantitative trading strategies. The China Securities Regulatory Commission (CSRC) announced significant increases in margin requirements for short selling, effective July 22, making such trades more costly for hedge funds and other investors. Concurrently, China Securities Finance Corp., the country’s largest securities lending provider, will halt its lending business to brokerages starting July 11.
These moves, unveiled after the CSI 300 Index experienced notable declines, underline China’s resolve to mitigate a market slump that has wiped out nearly $1 trillion in onshore market value since mid-May. While initially buoying investor sentiment and triggering gains in Chinese stocks, the long-term impact remains uncertain given the limited involvement of short sellers in China’s market.
Authorities in China, along with counterparts in South Korea and Thailand, have been among the most proactive in Asia in restricting short sales and quantitative trading, aiming to support equity prices. However, these measures have yet to address fundamental market weaknesses, including concerns over China’s housing market instability, renewed trade tensions, and subdued consumer confidence.
Redmond Wong, market strategist at Saxo Capital Markets, highlighted that the regulatory actions signal concerns about concentrated risks in the securities industry, particularly from accumulated short positions. While these measures may bolster prices of stocks with significant short interest and limited borrowing availability, their broader market impact is expected to be restrained.
The CSI 300 Index and the Hang Seng China Enterprises Index responded positively to the news, reversing recent losses. Despite earlier gains this year, Chinese stocks have retreated amid mounting concerns over corporate profitability. Efforts by China’s sovereign wealth fund to support markets through ETF purchases have underscored ongoing economic uncertainties.
President Xi Jinping is set to convene the Third Plenum, a pivotal government meeting, on July 15, with expectations tempered for extensive economic stimulus measures. Analysts from Goldman Sachs Group and JPMorgan Chase & Co. anticipate Beijing to focus on enhancing existing policies rather than introducing sweeping new measures.
Under the revised regulations, investors must now provide a margin deposit equivalent to 100% of the securities’ value for short selling, up from at least 80% previously. Private funds engaged in stock lending face an increased margin ratio of 120%, compared to the prior minimum of 100%. These changes are anticipated to curtail existing short positions and limit new short-selling activities in the near term.
Steven Leung, executive director at UOB Kay Hian Hong Kong, emphasized that while these measures may prompt the closure of existing short positions, the performance of the A-share market will continue to hinge on economic fundamentals and corporate earnings over the medium term.
The CSRC’s recent actions align with earlier regulatory initiatives under Chairman Wu Qing, including heightened scrutiny of quantitative funds and expanded reporting requirements for offshore investors through mainland-to-Hong Kong trading channels. The regulator emphasized the necessity of daily supervision and timely adjustments to safeguard market stability and orderly development.
Despite the regulatory crackdowns, high-frequency trading (HFT) activities have decreased sharply, with the number of accounts falling by over 20% this year to approximately 1,600. Short selling in China had already plummeted following previous regulatory interventions in February, which banned the lending of certain shares. The outstanding value of short trades and securities lending has seen substantial declines since August 2023, reflecting diminished market participation in these activities.
According to data compiled by Bloomberg, short trades currently represent a minimal 0.05% of the market’s total value, with the outstanding securities lending value halving to 31.8 billion yuan ($4.4 billion) as of Tuesday.
Analysts, including Xu Kang, noted that while the latest measures may provide a temporary boost to market sentiment, they could reduce the effectiveness and efficiency of long-short strategies by increasing borrowing costs and potentially eroding performance.
In summary, China’s latest regulatory moves underscore its commitment to stabilizing the stock market amid persistent economic challenges, although the effectiveness of these measures in addressing underlying market vulnerabilities remains uncertain.
