In response to ongoing stock market turbulence, the Chinese securities regulator has taken another step to curb short-selling activities. The China Securities Regulatory Commission (CSRC) recently announced on its WeChat account that it will suspend the lending of restricted shares starting from January 29.
Restricted shares are typically subject to specific sale and transfer limitations, often imposed for reasons related to corporate governance policies or employee compensation plans, restricting their sale on the open market. However, they can be lent to traders involved in derivatives contracts, including short-selling.
The CSRC’s statement indicated that the new rules aim to “highlight fairness and reasonableness, reduce the efficiency of securities lending, and restrict the advantages of institutions in the use of information and tools, giving all types of investors more time to digest market information and creating a fairer market order.”
China has been taking measures to limit capital outflows in recent times. In a previous move, the country’s largest brokerage halted lending stocks to retail investors and raised margin requirements for institutional investors on January 22, following regulatory guidance. Another initiative in October involved the local commission implementing new rules for hedge funds, restrictions on shares lending by strategic investors, and increased supervision of arbitrage activities.
Short-selling is a financial strategy where investors borrow shares of a stock and sell them on the market, anticipating a decline in the stock’s price. This strategy is employed by investors who believe a stock is overvalued or due for a fall.
China’s stock market has faced significant challenges over the past year, with the CSI 300 Index benchmark declining by 11% in 2023 and the MSCI China Index falling almost 10%. Foreign investors have also exhibited decreased confidence in the Chinese market, selling over 170 billion yuan (approximately US$23.4 billion) worth of onshore stocks between July and November the previous year.
Despite these market challenges, China continues to invest heavily in pilot projects for its central bank digital currency (CBDC), the digital yuan. Various use cases for the digital yuan technology are being explored, including integration with foreign banks and settling commodities transactions on Shanghai exchanges.
