China suspends short selling to boost market confidence

China Securities Regulatory Commission (CSRC) in Beijing Photo:VCG

China’s top securities regulator has suspended securities lending from Thursday as part of its measures to strengthen countercyclical adjustments and maintain stock market stability.

As a result of the stimulus measures, major stocks in China closed higher at the end of trading. The Shanghai Composite Index rose 1.06 percent to 2,970.39 points. The Shenzhen Component Index rose 1.99 percent to 8,870.36 points, while the ChiNext Index rose 2.06 percent to 1,685.12 points.

The China Securities Regulatory Commission (CSRC) announced on Wednesday that it had approved an application by China Securities Finance Corp Ltd (CSF) to suspend securities lending. The suspension will take effect on Thursday.

Existing securities lending contracts can be extended but must be settled before September 30, the CSRC said in a statement.

Securities lending is the case where the CSF lends its own securities or securities issued under the Act to investment firms for the purpose of secondary lending.

The CSRC said it also approved agreements to raise margin requirements for short selling to 100 percent from at least 80 percent, while margin requirements for private equity funds will be raised to 120 percent from at least 100 percent. The new policy will take effect on July 22, according to the regulator.

A series of measures by the CSRC will help boost investor confidence and maintain market stability amid recent downward pressure, Yang Delong, chief economist at Shenzhen-based First Seafront Fund, told the Global Times on Thursday.

In addition to these measures, Yang called for pumping more long-term capital into the A-share market to reverse the stock market’s downward trend.

“The stock market is not only a barometer of the macroeconomy, but can also influence the economy in turn,” he said, noting that a healthy stock market can contribute more to the development of science and technology companies and make fortunes for investors.

Short selling in China has already declined dramatically following the CSRC’s tightened regulations in this regard, first announced in August 2023. According to the government agency, the outstanding amount for short selling fell by 64 percent and for securities lending by 75 percent by the end of June this year.

The latest measures led to a necessary adjustment of the domestic capital market’s stock supply and trading mechanisms and were a response to market voices, Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at Renmin University of China, told the Global Times on Thursday.

“The measures have aroused investors’ enthusiasm to a certain extent, but the effect is still in its early stages. The market pricing mechanism and financial fraud need to be corrected and improved,” he said, calling for serious implementation of the State Council’s nine-point policy.

In April, the State Council issued a guideline on strengthening regulation, risk prevention and promoting high-quality development of the capital market. This is the third guideline document issued by the State Council on capital markets in two decades.

In a concerted effort to strengthen the integrity of China’s capital markets, authorities have created a robust framework to curb financial fraud and improve market discipline. For example, the CSRC is pushing ahead with legal action to dramatically increase the maximum penalties for violations related to illegal information disclosure: from 600,000 yuan ($82,565) to 10 million yuan for companies and from 300,000 yuan to 5 million yuan for individuals.

Given continued positive macroeconomic data and expectations of measures to further deepen reforms and promote China’s modernization, international financial institutions are becoming increasingly optimistic about the outlook for Chinese equities.

Yang called for confidence and patience in assessing the Chinese stock market, stressing that the recovery of the Chinese economy is expected to gain momentum in the second half of the year, leading to a rebound in the stock market.