(News Bulletin 247) – Chinese stock exchange authorities have introduced new rules limiting short selling in order to support the markets.

China’s financial market regulator said on Tuesday (February 6) that it would prohibit brokers from borrowing securities to lend them to their clients and restrict securities refinancing mechanisms, as part of its efforts to to reduce short selling volumes.

The Chinese authorities are seeking to support their markets, while the CSI 300 index (which brings together the 300 largest companies listed in Shanghai and Shenzhen) hit a five-year low last week.

“No tolerance” for short sellers

On Monday, the China Securities Regulatory Commission (CSRC) warned it would have “no tolerance” for short sellers, warning that those who dare to break the law “will lose their shirt and rot in jail.”

The CSRC said on Tuesday that no new companies would be allowed to use the securities refinancing mechanism, which allows brokers to borrow shares which they then lend to their clients to carry out short sales. Existing authorizations will be phased out.

Short-selling consists of borrowing a share from an intermediary (by paying him a rent agreed in advance) to resell it immediately on the markets. Secondly, the short seller buys back the stock in question to return it to its original owner. In the meantime, if the stock price has fallen, he pockets the difference (minus the rent paid). On the other hand, if the price rises, it accumulates losses (without theoretical limit). A very risky bet, as we explained here.

Chinese regulations prohibit selling shares on the same day they are purchased, but some investors get around this rule by borrowing shares to sell them. The CSRC said such traders would now be prohibited from borrowing shares.

A rebound in Chinese markets

Efforts to limit short selling led to a 24% drop in securities lending activity, the CSRC said.

In a sign that the government is attentive to the state of its markets, Chinese President Xi Jinping is to discuss domestic financial markets with regulators, according to Bloomberg News information published Tuesday.

State-owned investment fund Huijin Investment, which injects capital into Chinese markets by purchasing securities, also said on Tuesday that it has expanded its investment scope to listed funds (ETFs), according to a statement on its website.

The announcements supported Chinese markets, which ended higher after six consecutive sessions of decline. The Shanghai SSE Composite closed with a gain of 3.23%, the CSI 300 3.48%.

(With Reuters)