In an effort to curb a deepening stock market decline, China has officially restricted short selling after previous informal measures failed to yield the desired results. The Shenzhen and Shanghai bourses announced on Sunday that investors purchasing shares will not be allowed to lend them for short selling within an agreed lock-up period.

The new measures, set to be effective from Monday, aim to “create a fairer market order,” according to the China Securities Regulatory Commission. Further restrictions on securities lending are scheduled to be introduced from March 18, as authorities seek to stabilize the market amidst concerns over the country’s economic growth prospects.

Facing mounting pressure to address the ongoing stock sell-off, Chinese regulators are taking steps to instill confidence. Premier Li Qiang pledged “more forceful” state support for the market last week. However, Friday’s market performance indicated investor skepticism about Beijing’s stimulus measures, as shares fell, ending a three-day winning streak.

The benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks closed 0.3% lower on Friday, while the Hang Seng China Enterprises index in Hong Kong dipped 2%. The CSI 300 experienced an 11% decline in 2023, marking its third consecutive year of losses. Similarly, the Hang Seng index, which features many of China’s largest companies, fell 14% over the same period, marking its fourth consecutive annual decline.

Sunday’s announcement represents an escalation by the regulator, which had been relying on informal curbs since October. Regulators had issued private instructions, known as “window guidance,” to certain investors, limiting their ability to be net sellers of equities on specific days. Recent efforts also include tightening capital outflow movements by restricting access to funds investing in offshore securities.

While the short selling ban is seen as a government signal, doubts linger about its effectiveness. Gary Ng, senior economist at Natixis, commented, “Whether China’s equity market can stabilize will still depend on confidence.”

The market rout has taken a toll on domestic investors, particularly retail investors who suffered significant losses from derivatives known as snowballs. These derivatives guarantee interest payments if stock indices trade within a specified range. Despite their relatively small size in the overall equity market, the snowball wipeout is believed to be intensifying selling pressure on Chinese stocks.

Last week, Morgan Stanley adjusted its 12-month forecast for the MSCI China index of global Chinese listings, shifting from a rally to no change, in contrast to other banks that still anticipate a rally in the market this year.
By Delino Gayweh
Serrari Financial Analyst
January 29, 2023