Serrari Group

In an effort to fortify a faltering stock market, Chinese authorities are intensifying controls on short-selling activities. The move by the Securities Regulatory Commission involves raising margin ratios for ordinary securities borrowing and hedge funds, with an effective date of October 30, 2023. These regulatory changes come as part of a broader strategy aimed at addressing concerns surrounding China’s equity market.

The new measures entail increasing the margin ratio for ordinary securities borrowing to a minimum of 80%, up from the previous 50%, while hedge funds will now face a margin ratio of 100%. In addition to these margin adjustments, other rules came into effect on the same day to address various arbitrage activities, restrict lending of shares by strategic investors and senior management, and boost supervision of such activities, as outlined in a statement issued by the Securities Regulatory Commission.

China has been taking proactive steps to counteract the downtrend in equities, which saw global funds divest a record 89.7 billion yuan ($12.3 billion) worth of onshore stocks via trading links with Hong Kong in August. The market is closely monitoring the impact of these new regulations and other measures announced in recent weeks, with hopes of bolstering the benchmark CSI 300 Index, which has declined by approximately 6% this year in light of China’s economic growth challenges.

While analysts from China International Capital Corp. believe that the new measures will “improve market sentiment and boost investor confidence,” they anticipate that the overall impact on the stock market might be “relatively limited.” This prediction stems from the fact that short-selling transactions represent only 0.13% of mainland-listed shares currently in circulation.

The revised rules also contain provisions prohibiting investors and related parties who hold shares subject to transfer restrictions from engaging in short-selling activities during the lockup period. The increase in the margin ratio is expected to reduce the volume of securities-lending transactions and potentially constrain related activities at certain financial institutions.

Despite these regulatory adjustments, broader negative sentiment persisted in the equity markets, with the CSI 300 Index falling by as much as 0.9% on the day of the announcement. Similarly, a gauge of Chinese equities listed in Hong Kong experienced a decline of up to 0.7%. The markets continue to grapple with uncertainty, closely observing the effectiveness of these measures in the days and weeks ahead.

China Securities Regulatory Commission (CSRC) in Beijing Photo:VCG
By: Delino Gayweh
Serrari Financial Analyst
16th October, 2023

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