China tightens rules on short selling in a bid to boost stocks

CHINA is tightening curbs on short-selling activities as authorities step up efforts to shore up a struggling stock market.

The Securities Regulatory Commission said it’s increasing the margin ratio for ordinary securities borrowing to at least 80 per cent from 50 per cent and that for hedge funds to 100 per cent, effective Oct 30. Other rules that come into force on Monday (Oct 16) will restrict lending of shares by strategic investors and senior management and increase supervision of “various arbitrage activities”, it added on Saturday (Oct 14).

Beijing is pulling out all the stops to reverse a downdraft in equities after global funds offloaded a record 89.7 billion yuan (S$16.8 billion) of onshore stocks via trading links with Hong Kong in August. It remains to be seen if the new rules and other measures unveiled in recent weeks will be enough to prop up the benchmark CSI 300 Index, which has fallen about 6 per cent this year as China’s growth faltered.

The measures will help “improve market sentiment and boost investor confidence”, China International Capital analysts including Li Peifeng wrote in a note on Monday. But the overall impact on the stock market might be “relatively limited”, given that outstanding short-selling transactions only involve 0.13 per cent of mainland-listed shares that are in circulation, they said.

Under the revised rules, investors and related parties who hold shares with transfer restrictions are not allowed to short-sell the company’s stock during the lockup period, the regulator said. The increase in the margin ratio may help to shrink the volume of securities-lending transactions and restrict related businesses at some financial institutions, according to the analysts.

The latest guidelines failed to reverse the broader negative sentiment in equity markets on Monday, with the CSI 300 Index falling as much as 0.9 per cent. A gauge of Chinese equities listed in Hong Kong retreated as much as 0.7 per cent. BLOOMBERG