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March 3, 2024

China Clamps Down on Short Selling Amid Ongoing Stock Market Slide

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Jan 29, 2024

China’s securities regulator announced a number of new measures over the weekend aimed at curbing short selling and stabilizing the country’s struggling stock markets. This comes amid a steep sell-off that has wiped out over $2.3 trillion in market value since a peak in February 2021.

Regulators Suspend Lending of Restricted Shares, Limit Refinancing

On Saturday, the China Securities Regulatory Commission (CSRC) said it would suspend lending on restricted shares starting Monday. This prevents investors from borrowing these shares to then sell them short. The CSRC also directed brokers to limit the amount of refinancing transactions, which can amplify volatility.

These moves expand upon existing restrictions on short selling of certain stocks. Analysts say the new curbs could reduce selling pressure in the near term but likely won’t resolve deeper issues weighing on market sentiment.

“The messaging seems to be aimed at restoring confidence, but determining whether it actually flows through to improved share price performance will be contingent on the broader economic and regulatory environment,” said Cole Akeson, an analyst at Rhodium Group.

Regulators Pressure Funds on Short Selling, Stock Index Futures

China’s securities watchdog has also privately asked mutual funds and other institutional investors to curb short selling of stock index futures, according to sources cited by Bloomberg.

Index heavyweights like Kweichow Moutai Co. and Contemporary Amperex Technology Co. have borne the brunt of selling pressure. Kweichow is down 22% year-to-date, while CATL has plunged 50% from its 2021 peak.

Stock 2022 Peak Value Current Value % Change
Kweichow Moutai Co. ¥2,129 ¥1,659 -22%
Contemporary Amperex Technology Co. ¥695 ¥347 -50%

Regulators are also discouraging insurers from short selling as they aim to stem market losses across the board. However, critics argue limiting legitimate short selling could store up volatility.

“Because regulators are continuing to clamp down on price discovery mechanisms without addressing weak fundamentals, bearish views are likely to reemerge later on,” said Dexter Roberts, senior fellow at the Atlantic Council.

Recent Rally Quickly Unwound

China’s equity benchmark CSI 300 Index rallied over 7% through Tuesday after Beijing pledged to focus on economic growth and support capital markets. However, the index then slid 5.7% on Wednesday amid a wider risk-off move.

Renewed selling pressure highlights lingering skittishness among investors. Sentiment remains fragile following regulatory crackdowns in 2021 and concerns over China’s property sector crisis.

Adding to weakness are fears of tighter liquidity conditions as the People’s Bank of China struggles to revive credit growth while also supporting the yuan.

Policymakers Send Reassuring Messages

China’s top securities regulator, Fang Xinghai, said on Friday authorities will crack down on financial crimes this year while making capital markets fairer and more transparent.

Fang added the CSRC will balance market stability with risk prevention, noting extreme volatility harms investor interest.

Other senior officials also pledged support in recent days:

  • Liu Guoqiang, deputy governor of the People’s Bank of China, said the central bank has room to act and will keep liquidity reasonably ample.

  • Zou Lan, head of financial markets at the central bank, stated monetary policy would be more forward-looking and flexible.

Analysts say reassuring messages signal authorities’ determination to prevent a market crisis, though ultimately boosting confidence hinges on effectively handling systemic risks around property and local government debt.

Outlook Remains Murky

Though short-term curbs could briefly stem losses, China faces a challenging road to recovery as its economy slows amid persistent drags from COVID-19 policies and global headwinds.

Tighter regulation also continues sidelining private companies and tech giants that have driven past growth.

With markets sitting near lows last seen during the 2015-2016 crash, investors are anxiously monitoring to see whether stabilizing measures gain traction or selling pressure intensifies.

“Much depends on whether investors view the regulatory announcements as sufficient commitment by Beijing to stem the rout,” said Paul Delaney of Asia Research & Consulting. “If bearish momentum overwhelms near-term relief, we could see another leg down.”

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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