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China Watchdog Tightens Short Selling Rules to Bolster Market

China Watchdog Tightens Short Selling Rules to Bolster Market

The China Securities Regulatory Commission is tightening rules on short selling and high-frequency trades in a bid to crack down on improper arbitrage and maintain market stability.


The market watchdog approved the mainland stock exchanges to boost margin requirements in short selling, starting July 22. Meanwhile, China Securities Finance Corp., the country’s biggest stocks lending provider, will suspend its business of lending securities to brokerages starting July 11, with outstanding contracts to be settled by the end of September, the CSRC added. 

The moves align with a slew of other steps taken by CSRC to shore up the stock market, responding to investors’ concerns amid sluggish returns. Beijing has a history of limiting short selling at times of market volatility, with an aim to avert a downward spiral in stocks. 

Known for his tough clampdowns on brokerages as a CSRC official in the mid-2000s, Wu Qing, the regulator’s chairman, is resorting to more stringent measures to prevent the stock-market slump from extending into a fourth year. 

Under tightened rules, investors would need to put down a margin deposit equivalent to 100% of the value of the securities they seek to borrow for short selling, the regulator said in a statement on Wednesday. Until the change, the ratio has been at least 80%. 

The margin ratio for private funds participating in stock lending is also raised to 120% from at least 100%. New rules will become effective from July 22.

The market also is in need of strengthened daily supervision and other adjustment measures in a timely manner, the regulator said, vowing to enforce rules on illegal activities. The changes are “beneficial to preventing risks and safeguarding the market’s stable and orderly development,” the CSRC said in the statement. 

In addressing programmed trading, the regulator said it will guide stock exchanges to implement as soon as possible monitoring standards and delineate the “red line” for abnormal trades. 

Charges for additional traffic in high-frequency quantitative transactions are also being considered. But the regulator also noted that the number of high-frequency trading accounts in China has dropped more than 20% so far this year to some 1,600. 

The CSRC will also work with their counterpart in Hong Kong to study plausible approaches for a mechanism for investors to report their programmed trades via the northbound stock link. 

The regulatory changes may lead to the shrinking of the scale of traders’ long-short strategies and excess returns also may decrease, according to a Huachuang Securities note Wednesday. 

But suspending the securities lending business and the overall increase in the margin rate “would help lift market sentiment,” the note said.

The outstanding securities-lending value has more than halved since end-2023 to 31.8 billion yuan ($4.4 billion) as of Tuesday, according to Bloomberg-compiled data.

Chinese shares have been sluggish this year, with no sign of a let-up after a harrowing 2023, due to increasing economic growth pressures at home and tariff disputes with the nation’s major trading partners. 

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