China’s ‘short-sighted’ short-selling curbs may backfire, cause long-term pain: analysts

Name: SCMP
Telephone: +852-2680-8888

Move will have ‘little material impact’ but could ‘spook investors and suck the life out of trading volumes’, analysts say

Reading Time:3 minutes

Why you can trust SCMP

A Chinese flag flutters outside the China Securities Regulatory Commission (CSRC) building in Beijing on February 8, 2024. Photo: Reuters

Zhang Shidongin Shanghai

Published: 6:00pm, 12 Jul 2024

China’s latest move to curb short selling to prop up the flagging stock market drew scepticism about its effectiveness from market observers, with some saying the crackdown would bring only fleeting relief but has the potential to cause long-term fallout.

The new restrictions on short selling, announced on Wednesday, will drain liquidity and discourage new participants in the long term, according to KCM Trade and SPI Asset Management. Everbright Securities described the step as “short-sighted”, saying it was an overkill given the already low level of shorted positions.

“From a regulatory standpoint, tightening the screws on short selling is one way of implementing a quick fix,” said Tim Waterer, chief market analyst at KCM Trade. “However the longer-term effects are rather more murky, and such measures don’t always yield the desired consequences. While short selling activity can create volatility, it is far from the only factor influencing market sentiment and patterns. Long-term headwinds include economic slowdown, geopolitics and domestic demand challenges.”

The China Securities Regulatory Commission (CSRC) surprised the market on Wednesday night by announcing an immediate suspension of the so-called securities relending business by state-backed margin finance firm China Securities Finance – the most common mechanism used for short selling. Under the relending business, China Securities Finance borrowed stocks from institutional investors such as asset managers and insurance firms, and then lent these to brokerages on demand from short sellers.

The CSRC also boosted the margin deposit ratio for short selling to 100 per cent of the shorted stocks from 80 per cent. The ratio is 120 per cent for hedge funds. The regulator also said that it would hammer out more specific rules to slow down high-frequency algorithmic trading.

The CSI 300 Index rose 0.1 per cent on Friday, extending a 1.1 per cent gain on Thursday for the biggest rise in two months.