China has ratcheted regulations on short selling to fortify its struggling stock market and boost traders' activity. The China Securities Regulatory Commission (CSRC) has set new margin requirements for investors who wish to engage in short-selling activities. The move comes amid a broader campaign to improve investor sentiment and market stability.

Has the Chinese Dragon Lost Its Power?

China's financial watchdog announced that starting 30 October, hedge funds looking to short-sell must have funds covering 100% of the transaction's value in their account. In contrast, other investors are required to hold at least 80%. The regulator has additionally limited the lending of shares by strategic investors and senior management while ramping up oversight of various types of arbitrage activities.

Beijing is going all-out to invigorate the stock market, especially following a massive selloff of 89.7 billion yuan ($12.3 billion) in onshore stocks by global funds through trading links with Hong Kong in August. The CSI 300 Index, a benchmark for mainland China stocks, has witnessed a decline of over 6% this year amid stagnating economic growth in the country.

The new measures “improve market sentiment and boost investor confidence,” said analysts from China International Capital Corp., including Li Peifeng. However, they note that the impact on the overall stock market might be modest, as short-selling transactions make up a meager 0.13% of mainland-listed shares currently in circulation.

Investors and related parties holding shares with transfer restrictions will now be barred from short-selling those shares during the lock-up period. According to market analysts, this is expected to reduce the volume of securities-lending transactions and impose limitations on some financial institutions' related businesses.

Despite these regulatory efforts, the stock market's reaction has been lukewarm at best. The CSI 300 Index fell marginally by 1% on Monday, while a gauge of Chinese equities listed in Hong Kong declined slightly more by 1.1%.

The new restrictions on short-selling are part of a larger initiative to uplift market sentiment, but their efficacy in achieving a significant turnaround remains to be seen. With ongoing economic headwinds, the Chinese government is pulling multiple levers to stabilize the market, but the question of whether these measures will suffice hangs in the balance.

China Tightens Offshore Trading Rules While Expanding Stock Connect Options

In a series of moves aimed at tightening financial regulation and stabilizing its currency, China's CSRC has rolled out new measures that impact both domestic and international trading practices. The CSRC's Shanghai unit issued a notice on 28 September 2023, prohibiting domestic brokerages and their overseas operations from accepting new mainland clients for offshore trading.

Although the exact effective date remains unspecified, insiders believe the changes are immediate. The regulator also gave a deadline until the end of October to remove any apps and websites aimed at recruiting mainland clients for offshore trading.

Adding another layer to its regulatory oversight, the CSRC has intervened to curb hasty stock sell-offs following marital splits among China's elite. Amid rising divorce rates, the regulator has implemented a rule that limits large stakeholders, those with at least a 5% share in a company, from selling more than 2% of their shares within a 90-day period. This move is seen as a strategy to bring moderation to stock market transactions and to counter any suspicious activities.

In a contrasting move to offer more flexibility in the market, securities regulators in China and Hong Kong have approved the integration of block trading and manual trades into Stock Connect. This cross-border platform enables investors to trade shares listed on both the Shanghai Stock Exchange and the Hong Kong Stock Exchange.