Bears flee China stock markets as regulatory curbs squash short positions to a 4-year low

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The value of stocks shorted on the mainland’s exchanges has slid to US$3.2 billion, a level not seen since May 7, 2020

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The Shenzhen Stock Exchange building in Shenzhen, China, on Tuesday, July 2, 2024. Photo: Bloomberg

Zhang Shidongin Shanghai

Published: 3:33pm, 1 Aug 2024Updated: 4:35pm, 1 Aug 2024

A slew of regulatory constraints has forced the unwinding of bearish bets on Chinese stocks providing tonic to investors which some analysts say could lift sentiment and drive markets higher.

The outstanding value of shorted stocks on the mainland’s exchange slid to 23.2 billion yuan (US$3.2 billion) at the end of July, a level not seen since May 7, 2020, according to data from China Securities Finance and Bloomberg. The value dropped 0.6 per cent on July 31, marking the 15th straight day of declines for the longest such streak on record, the data showed.

The unravelling came after the China Securities Regulatory Commission (CSRC) unveiled a flurry of decisions last month aimed at curbing the practice of borrowing stocks for the purpose of short-selling. It suspended the securities-lending business of state-backed margin finance company China Securities Finance and raised the minimum collateral that short-sellers need to pledge. Short selling has been in the regulator’s cross hairs over the past year as it has been partly blamed for the years-long downturn in the nation’s US$8.5 trillion stock market.

In short-selling, investors sell stocks borrowed from brokerages or other investment institutions and seek to profit from buying back the shares at lower prices to return the securities to lenders.

The newly introduced restrictions are “aimed at protecting the interest of small investors that are very concerned about short selling and programme trading,” said Liu Jiawei, an analyst at Dongxing Securities. “That will help ease sell-offs, crack down on wrongdoings and build up positive sentiment that will drive the market higher.”

Investors who borrow stocks from China Securities Finance, a key source of stocks loaned to short sellers, will need to cover their positions by the end of September, the CSRC said last month. Earlier, the securities watchdog also prohibited major shareholders of listed companies from lending their locked-up shares, and required brokerages to strengthen oversight of clients’ trading accounts.