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 China's stock exchanges and market watchdogs are cracking down on
short-selling as part of a government-run effort to prevent a
collapse in the country's markets, which have lost almost 30 percent
of their value since peaking in June.
The sell-off, which followed a dizzying rally, has shattered
investor confidence in Chinese stocks and shaken the faith of some
foreign investors in the ability of the ruling Communist Party to
maintain stability of the financial system.
The Shanghai and Shenzhen exchanges said in separate statements on
Monday night that new rules, effective immediately, banned traders
from borrowing and repaying stocks on the same day - a step that
raises risks for short-sellers.
On Tuesday, as the markets regained ground, major brokerages Citic
Securities and Huatai Securities said they would temporarily halt
their short-selling services. They were joined by smaller rival
Great Wall Securities.
"In order to comply with urgent changes in exchange rules and
control business risks, as of today we are temporarily halting our
short selling business," Citic said in a statement.
The CSI300 index of blue chip Shanghai and Shenzhen stocks closed
3.1 percent higher. The Shanghai Composite Index jumped 3.7 percent
to 3,756.54 points - still well off the 4,500 target set by Beijing
as its benchmark for a return of market confidence.
The China Securities Regulatory Commission (CSRC) has declared war
on "malicious" short-sellers and is also scrutinizing the use of
automated trading strategies favored by hedge funds to profit from
market volatility.
On Monday, it froze a trading account linked to Citadel Securities,
a unit of the U.S. group that also owns hedge fund Citadel LLC - the
first time in the crackdown that a foreign firm confirmed one of its
Chinese accounts had been suspended.
Citadel said it complied with all local laws and regulations.
CRACKDOWN RISKS BACKFIRING
"This is apparently aimed at increasing the cost of shorting and
easing selling pressure on the market," Samuel Chien, a partner of
Shanghai-based hedge fund manager BoomTrend Investment Management
Co, said about the new rules.
He added, though, that short-selling was already difficult,
referring to other efforts to limit the practice. Apart from Citic,
other brokerages have limited short-selling.
Many fund managers say the campaign against shorting has decayed
into a general crackdown on risk management strategies, which could
backfire. By denying investors tools with which they hedge their
share holdings, they are inadvertently encouraging them to sell
those stocks.
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"In recent days we have been often asked by mainland regulators not
to hold short positions in index futures," said a Chinese
derivatives trader at a European bank in Hong Kong.
He said regulators insisted these short positions be closed even if
they were covered by corresponding long positions. "If we tell them
that if we do that, we will have to sell our cash holdings, thus
exacerbating the very volatility they want to prevent, they don't
seem to understand."
The CSRC did not immediately respond to a request for comment.
China's state margin-lending agency, tasked with stabilizing the
stock market, has injected 200 billion yuan ($32.21 billion) since
July into five newly launched mutual funds, the official China
Securities Journal said on Tuesday.
The China Securities Finance Corp is also managing a 120 billion
yuan bailout fund formed by 21 brokerages, and last month provided
260 billion yuan in credit lines to brokerages to help them buy
stocks via proprietary trading.
The market turmoil, and Beijing's stumbling efforts to restore
confidence, are also playing out against the backdrop of a slowing
economy and worries over high corporate indebtedness.
China's Commerce Ministry said on Tuesday that import growth was
likely to remain at a low level. Weak import growth is considered a
sign of sluggish domestic demand.
Factory activity shrank more than initially estimated in July,
contracting by the most in two years as new orders fell and dashing
hopes that the economy may be steadying, a private survey showed on
Monday.
(Reporting by Samuel Shen and Sue-Lin Wong; Writing by Mark Bendeich;
Editing by Dean Yates)
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