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China Cracks Down on Short Sales, Quants to Boost Stocks

(Bloomberg)

(Bloomberg) -- China took some of its most extreme steps yet to restrict short selling and quantitative trading strategies, seeking to support the nation’s sliding stock market as a closely-watched economic policy meeting approaches.

The China Securities Regulatory Commission approved an increase in margin requirements for short selling starting July 22, making the trades more expensive for hedge funds and other investors. Meanwhile, China Securities Finance Corp., the country’s biggest stocks lending provider, will suspend its business of lending securities to brokerages starting July 11.

The measures, announced late Wednesday after the benchmark CSI 300 Index dropped for the sixth time in seven sessions, send a clear signal that authorities want to stem a slump that erased about $1 trillion of onshore market value since mid-May. While that’s providing a knee-jerk boost to sentiment — Chinese stocks gained Thursday — the limited role of short sellers in China suggests any long-term impact may be limited.

Chinese authorities, along with counterparts in South Korea and Thailand, have been among the most aggressive in Asia in restricting short sales and quantitative trading strategies in an attempt to bolster share prices. Yet the moves have done little to address the root causes of weak markets, which in China include persistent concerns about its housing crisis, renewed trade tensions and low consumer confidence.

“The move sent another signal that the regulators are concerned about the risks to the securities industry given the buildup of short positions that may be concentrated,” said Redmond Wong, market strategist at Saxo Capital Markets. “It may prop up the prices of some stocks that have a large short interests and are difficult to find to borrow. For the broader market, the impact is likely to be limited.”

The CSI 300 Index gained more than 1%, on track to snap a run of weekly losses. The Hang Seng China Enterprises Index, which tracks big Chinese firms, rose as much as 1.6% in Hong Kong. 

After rallying sharply from February, Chinese stocks have slid since May as unease grew over poor corporate profits. The CSI 300 has given up almost all of its gains this year, while the MSCI China Index earlier fell into a technical correction. There are signs that the nation’s sovereign wealth fund is once again propping up markets through purchases of exchange-traded funds.

President Xi Jinping will convene the government’s Third Plenum, a once-in-five-years gathering, on July 15. Expectations for a massive stimulus are subdued, with analysts from Goldman Sachs Group to JPMorgan Chase & Co. saying that Beijing will likely just sale up existing measures.

Under the new rules, investors 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 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%. 

“In the short term, this will trigger the closing of existing short positions and limit the new opening of short-selling activities,” said Steven Leung, executive director at UOB Kay Hian Hong Kong. In the medium term, “the A-share market still performs on economic fundamentals & corporate earnings,” he said.

The CSRC’s latest moves align with other steps taken by the regulator since Wu Qing became its chairman. Back in February, officials said quant funds will be scrutinized and new entrants will have to report their strategies to regulators before trading. Beijing has also expanded the scope of reporting of offshore investors via a mainland-to-Hong Kong trading link. 

The market is in need of strengthened daily supervision and other adjustment measures in a timely manner, the regulator said. The changes are “beneficial to preventing risks and safeguarding the market’s stable and orderly development,” it said. 

While the regulator is now also considering charges for additional traffic in high-frequency quantitative transactions, it noted that the number of HFT accounts in China has dropped more than 20% so far this year to some 1,600. 

Short-selling in China had already drastically declined in the wake of the February measures, when the lending of some shares were banned. The outstanding amount of short trades and securities lending plunged by 64% and 75%, respectively, from August 2023, according to the regulator.

Short trades account for just 0.05% of the market’s total value, the CSRC 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.

Of those, 29.6 billion yuan has been through stocks provided by China Securities Finance Corp., according to Huachuang Securities.

“While this may lift sentiment to a certain extent, it will impact long-short strategies by increasing their cost of borrowing securities and lowering efficiency and eroding their outperformance,” wrote analysts including Xu Kang in a note.

--With assistance from Jing Jin, Charlotte Yang and Foster Wong.

(Updates with market reaction in third and sixth paragraphs. Details on short trades in 15th paragraph)

©2024 Bloomberg L.P.

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