Short Selling Regulations Expected to Boost Trader Activity in China

<p>China has
ratcheted regulations on short selling to fortify its struggling stock market
and boost traders' activity. The China Securities Regulatory Commission (CSRC)
has set new margin requirements for investors who wish to engage in short-selling
activities. The move comes amid a broader campaign to improve investor
sentiment and market stability.</p><p>Has the Chinese Dragon
Lost Its Power?</p><p>China's
financial watchdog announced that starting 30 October, hedge funds looking to
short-sell must have funds covering 100% of the transaction's value in their
account. In contrast, other investors are required to hold at least 80%. The
regulator has also limited the lending of shares by strategic investors and
senior management while ramping up oversight of various types of <a href="https://www.financemagnates.com/terms/a/arbitrage/">arbitrage</a>
activities.</p><p>Beijing is
going all-out to invigorate the stock market, especially following a massive
selloff of 89.7 billion yuan ($12.3 billion) in onshore stocks by global funds
through trading links with Hong Kong in August. The CSI 300 Index, a benchmark
for mainland <a href="https://www.financemagnates.com/tag/china/" target="_blank" rel="follow">China stocks</a>, has witnessed a decline of over 6% this year amid
stagnating economic growth in the country.</p><p>The new measures
“improve market sentiment and boost investor confidence,” said analysts from
China International Capital Corp., including Li Peifeng. However, they note
that the impact on the overall stock market might be modest, as short-selling
transactions make up a meager 0.13% of mainland-listed shares currently in
circulation.</p><p>Investors
and related parties holding shares with transfer restrictions will now be
barred from short-selling those shares during the lock-up period. According to
market analysts, this is expected to reduce the volume of securities-lending
transactions and impose limitations on some financial institutions' related
businesses.</p><p>Despite
these regulatory efforts, the stock market's reaction has been lukewarm at
best. The CSI 300 Index fell by 1% on Monday, while a gauge of Chinese equities
listed in Hong Kong declined by 1.1%.</p><p>The new
restrictions on short-selling are part of a larger initiative to uplift market
sentiment, but their efficacy in achieving a significant turnaround remains to
be seen. With ongoing economic headwinds, the Chinese government is pulling
multiple levers to stabilize the market, but the question of whether these
measures will suffice hangs in the balance.</p><p>China Tightens Offshore
Trading Rules While Expanding Stock Connect Options</p><p>In a series
of moves aimed at tightening financial <a href="https://www.financemagnates.com/terms/r/regulation/">regulation</a> and stabilizing its currency,
China's CSRC has rolled out <a href="https://www.financemagnates.com/forex/china-implements-new-restrictions-on-offshore-trading/" target="_blank" rel="follow">new measures</a> that impact both domestic and
international trading practices. The CSRC's Shanghai unit issued a notice on 28
September 2023, prohibiting domestic brokerages and their overseas operations
from accepting new mainland clients for offshore trading. Although the exact
effective date remains unspecified, insiders believe the changes are immediate.
The regulator also gave a deadline until the end of October to remove any apps
and websites aimed at recruiting mainland clients for offshore trading.</p><p>Adding
another layer to its regulatory oversight, <a href="https://www.financemagnates.com/trending/chinas-fat-cats-turning-to-divorce-for-quick-stock-sales/" target="_blank" rel="follow">the CSRC has also intervened</a> to curb
hasty stock sell-offs following marital splits among China's elite. Amid rising
divorce rates, the regulator has implemented a rule that limits large
stakeholders—those with at least a 5% share in a company—from selling more than
2% of their shares within a 90-day period. This move is seen as a strategy to
bring moderation to stock market transactions and to counter any suspicious
activities.</p><p>In a
contrasting move to offer more flexibility in the market, securities regulators
in China and Hong Kong <a href="https://www.financemagnates.com/institutional-forex/mainland-china-and-hong-kong-to-bolster-stock-connect-with-block-trading/" target="_blank" rel="follow">have approved</a> the integration of block trading and
manual trades into Stock Connect. This cross-border platform enables investors
to trade shares listed on both the Shanghai Stock Exchange (SSE) and the Hong
Kong Stock Exchange (HKEX). </p>

This article was written by Damian Chmiel at www.financemagnates.com.