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Chinese regulators curb short selling as market downturn deepens

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China has moved to officially limit short selling after informal efforts failed to stop a worsening stock market sell-off.

Investors who buy shares will not be allowed to lend them out for short selling within an agreed lock-up period, the Shenzhen and Shanghai bourses said on Sunday.

The measures, which will come into effect from Monday, are designed to “create a fairer market order”, the China Securities Regulatory Commission said. Further limitations on securities lending will be introduced from March 18, the regulator added.

Regulators are coming under increasing pressure to halt the stock sell-off, which has been fuelled by uncertainty over the country’s economic growth prospects.

China’s premier Li Qiang last week promised to deliver “more forceful” state support for the market. But shares fell on Friday, ending a three-day winning streak and suggesting that investors were not convinced by Beijing’s stimulus measures.

The benchmark CSI 300 index of Shanghai- and Shenzhen-listed stocks closed 0.3 per cent lower on Friday, while the Hang Seng China Enterprises index in Hong Kong dipped 2 per cent.

The CSI 300 fell 11 per cent in 2023, its third consecutive year of decline. The Hang Seng index, where many of China’s biggest companies are dual-listed, fell 14 per cent over the same period, its fourth consecutive annual fall.

Sunday’s announcement marks an escalation by the regulator, which has been using informal curbs to try and stem outflows since October. Regulators have been issuing private instructions — known as “window guidance” — to some investors, preventing them from being net sellers of equities on certain days.

More recently, Chinese authorities have tightened capital outflow movements by limiting access to funds that invest in offshore securities.

Experts cast doubt on how effective the ban is likely to be. “While the short selling ban is a government signal, it is only a band-aid with limited impact,” said Gary Ng, senior economist at Natixis. “Whether China’s equity market can stabilise will still depend on confidence.”

Domestic investors have been hit by significant losses as a result of the market rout.

Retail investors that loaded up on derivatives called snowballs — which guarantee a stream of sizeable interest payments provided stock indices trade within a certain range — are nursing big losses from the contracts.

Analysts have warned that despite their small size relative to the country’s equity market as a whole, the snowball wipeout could be increasing selling pressure on Chinese stocks.

Last week Morgan Stanley cut its 12-month forecast for the MSCI China index of global Chinese listings from a rally to no change, breaking with other banks that still expect a rally this year.

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