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China has moved to formally restrict short selling after informal efforts failed to stop the stock market’s decline from worsening.
The Shenzhen and Shanghai stock exchanges announced on Sunday that investors who bought shares would not be allowed to lend them for short sale within the agreed lock-up period.
The China Securities Regulatory Commission said the measure, which takes effect from Monday, aims to “create a fairer market order.” Further restrictions on securities lending will be introduced from March 18, the regulator added.
Uncertainty over the country’s economic growth outlook has put pressure on regulators to prevent stocks from falling.
Chinese Premier Li Qiang last week promised to provide “stronger” state support to the market. But stocks fell on Friday, ending a three-day winning streak and suggesting investors were unconvinced by the Chinese government’s stimulus plans.
On Friday, the benchmark CSI300 index of listed stocks in Shanghai and Shenzhen closed 0.3% lower, while Hong Kong’s Hang Seng China Enterprise Stock Index fell 2%.
The CSI300 index fell by 11% in 2023, marking the third consecutive year of decline. The Hang Seng Index, where many of China’s biggest companies are dual-listed, fell 14% over the same period, marking the fourth straight year of declines.
Sunday’s announcement marks an escalation by regulators, who have been implementing informal controls since October to stem capital outflows. Regulators have issued private instructions to some investors, known as “window guidance,” prohibiting them from selling stocks on certain days.
More recently, Chinese authorities have stepped up capital flight by restricting access to funds that invest in offshore securities.
Experts have questioned how effective the ban will be. “The ban on short selling is a signal from the government, but it is only a band-aid with limited effectiveness,” said Gary Ng, senior economist at Natixis. “The ability of China’s stock market to stabilize remains dependent on confidence.”
Domestic investors have suffered large losses as a result of the market crash.
Individual investors who loaded up on derivatives known as snowballs, which guarantee large interest payments if a stock index trades within a certain range, are facing huge losses on the contracts.
Analysts have warned that the snowballing devastation could increase selling pressure on Chinese stocks, despite their small size compared to the overall Chinese stock market.
Last week, Morgan Stanley lowered its forecast for the MSCI China Index of global stocks listed in China over the past 12 months from rising to unchanged, breaking with other banks who expect it to rise again this year.