chinese stock exchanges announce more measures to rein in short selling 1819742015
According to analysts, the new restrictions are likely to have only a limited impact
The benchmark Shanghai SSE index closed higher by 3.69% at 3,756.54 on Tuesday (August 4) after Chinese authorities took more steps to put a floor under their stock exchanges which have plummeted 27% since mid-June.
On Monday, after the close of trading, the Shanghai and Shenzen stock exchanges announced new rules to govern short selling trades.
The stock exchanges have banned short traders from borrowing and repaying stocks on the same day. Previously, the square-off transaction could be executed the same day, which, according to the authorities, exacerbates intra-day volatility.
Observing the spirit of the new exchange regulations, major brokerages such as CITIC Securities Company Limited (SHA:600030) and Huatai Securities Co., Ltd. (SHA:601688) announced Tuesday that they were temporarily suspending their short selling services. "In order to comply with urgent changes in exchange rules and control business risks, as of today we are temporarily halting our short selling business," Citic said.
However, analysts are of the opinion that the new rules, though aimed at making short selling more difficult and expensive, are unlikely to boost the market in a major way given that currently short selling is at a low ebb, as shown by the statistics for borrowed shares. According to Dow Jones, as of Monday, investors have borrowed shares worth just 3.48 billion yuan (US$0.56 billion) for shorting purposes, in a roughly 50 trillion yuan (US$8 trillion) stock market.
However, undeniably, these steps could help to shore up battered investor sentiment.
For fund managers, the crackdown on short-selling creates hurdles for their risk management practices. Often traders or funds hold short positions against corresponding long exposures such as cash equity holdings as a hedge. They point out that forcible closeout of short positions means the cash shares must then be offloaded into the market, creating selling pressures that the authorities want to avoid in the first place.
The Chinese securities regulator, which typically refers to short-selling transactions as “malicious,” has also opened up a front against algorithmic, or automated, trading commonly practised by hedge funds. On Monday, Citadel securities, owned by US hedge fund Citadel LLC, revealed that one of its Chinese trading accounts had been frozen by the authorities.
These steps follow on earlier measures such as a ban on major shareholders selling their stocks, and a suspension of new share offerings (IPOs). The authorities also retracted earlier restrictions on buying shares on margin.
