The China Securities Regulatory Commission, the securities regulator, has extended the curbs on short sales by imposing more caps on securities financing, as it continues efforts to stabilize the volatile A-share market.
Several securities firms including the country’ largest brokerage CITIC Securities Co Ltd 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.
The Shanghai and Shenzhen stock exchanges on Aug 3 evening issued statements that banned selling and buying back shares on the same day for short sellers.
The new trading rule means that if an investor borrows stocks from brokerages to sell, he or she will have to wait until the next day at the earliest to buy them back and clear the trading position. It also prevents speculators from cashing in on the hourly fluctuations in share prices.
The exchanges said that the purpose is to curb speculative short sales that could cause abnormal volatilities in share prices and affect market stability.
Proponents said that the regulator’s move is a temporary measure aimed at “plugging the loopholes” in short selling and stabilizing the market which has suffered a nearly 30 percent loss since mid-June.
Li Daxiao, chief economist at Yingda Securities Co Ltd, said the trading volume of short sales through securities financing remains relatively small in China and hence unlikely to have a substantial impact on market liquidity.
On Aug 4, stock prices rebounded strongly with the benchmark Shanghai Composite Index rising by 3.69 percent to close at 3,756.55 points. More than 650 stocks jumped by the 10 percent trading limit.
Investors in the A-share market had long been prohibited from shorting the market until the regulator launched the securities financing business and trading of stock index futures in 2010. It was the first time that Chinese investors were able to hedge risks by shorting the market.
But the heightened regulatory intervention on short sales is raising concerns among investors and analysts as it has weighed heavily on market turnover and liquidity.
The average daily turnover in the A-share market has dropped to $202 billion over the past 30 days, down by nearly 30 percent from the level at the start of July, according to Bloomberg.
The measure could also aggravate the imbalance between the bullish and bearish transactions in the market, analysts said.
As of Aug 3, the outstanding value of margin trading, a mechanism that allows investors to borrow money to buy stocks, stood at 1.29 trillion yuan ($210 billion) while the value for short sales was only 3.49 billion yuan, according to data from research company Wind Information Co Ltd.
Some analysts said that too much intervention may deter investors from entering the market as the necessary risk hedging tools have been restricted and may expose them to greater risks.