China is targeting short sellers, again

Photo by Paula Bronstein/Getty Images

Fresh from banning the intraday short selling of stocks on Monday evening, China’s securities regulator, the CSRC, announced additional restrictions overnight, imposing more caps on securities financing, as it continues efforts to stabilise the nation’s volatile stock market.

Several securities firms, including the country’s largest brokerage CITIC Securities, have temporarily halted the business which allows investors to borrow shares to sell in anticipation of lower prices so that they can buy them back for profits, according to a report from state-run newspaper China Daily.

Proponents said that the regulator’s move is a temporary measure aimed at “plugging the loopholes” in short selling and stabilising the market which has suffered a nearly 30% loss since mid-June, said the newspaper.

The constant reworking of market rules, along with many firms temporarily halting trade in their shares, has seen trading volumes tumble in recent weeks, something that will only add to market volatility rather than stymie it.

The newspaper reports that the average daily turnover of mainland stocks fell to 202 billion yuan over the past 30 days, down by nearly 30% from levels seen at the start of July.

Not only is volume drying up, many are now questioning why the regulator is specifically targeting shot sellers given the relatively small amount that occurs in Chinese stocks.

Research from Wind Information Company notes that the value of outstanding short sales currently stands at just 3.49 billion yuan. In comparison, outstanding margin debt used to finance stock purchases currently totals 1.29 billion yuan – a ratio of 370 to 1.

If the regulator is truly looking to stifle market volatility, perhaps the best ruling they could make is to ban the use of margin financing being used by inexperienced investors, rather than preventing short selling.

At the mid-session break on Wednesday the announcement appears to have had little impact on reducing volatility. The benchmark Shanghai Composite index is down 1.27% having been up earlier in the day.

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