Several Chinese securities houses, including Citic Securities, the country’s largest broker by assets, have voluntarily suspended short-selling of stocks after China's securities regulator moved to clamp down on the practice.
On Tuesday, Citic and Huatai Securities issued separate statements saying they would temporarily discontinue short-selling services. Huatai is the country's fourth largest broker by assets.
“In order to comply with urgent changes in [stock] exchange rules ... as of today we are temporarily halting our short-selling business as we adjust our platform [to meet the new requirements]," Citic said in a statement.
Several smaller mainland brokers, such as Great Wall Securities and Qilu Securities, followed suit later in the day.
The move comes after the Chinese securities watchdog stepped up a crackdown on short-selling on Monday in an attempt to curb high-frequency trading and further steady the world’s second largest equity market by value.
Traders engaged in selling borrowed shares are now required to wait at least one day to pay back their short positions, according to revised trading rules unveiled on Monday night by China’s two main stock exchanges.
Short cut
The amended rules, which went into effect immediately, forbid short sellers from borrowing and repaying stocks within a single day, a practice that could “amplify abnormal fluctuation in stock prices and affect market stability,” the Shenzhen bourse said in a statement posted on its website.
In a typical short sale, investors sell borrowed securities in anticipation of a price drop and buy them back at a lower price later on, profiting from the price difference.
The rule change will constrain short-sellers.
“Previously, you can go short, cover your positions and lock your profit as many times as you want if you are really good,” said a Beijing-based portfolio manager at Citic. “Under T+1, you have to wait till the next day. You can’t short sell as frequently.”
The new settlement system, known by the market shorthand of T+1, or trade plus one day, will not affect normal stock trading and securities lending business and will help to stabilise the market, according to the Shenzhen exchange statement.
Small potatoes
Market insiders and analysts are sceptical of the rule's ability to curb volatility, characterising the move as more “symbolic” than “pragmatic” due to the small scale of securities lending.
According to data from China Securities Finance Corporation, the amount of securities lending reached Rmb3.5 billion, or about 0.01% of the tradeable market value in China, at Monday's close. By comparison, the amount of margin financing reached Rmb1.29 trillion.
Moreover, Judy Zhang, a China banking analyst for BNP Paribas, said the crackdown won’t “have a significant impact” on brokers’ revenue as they may stand to earn more interest income thanks to a longer loan period.
The latest crackdown on short-selling can be seen as part of Beijing's market rescue measures in response to the stock market collapse from mid-June to early July, when China's equity markets sank by about 30%, erasing more than $3 trillion from the value of China's listed companies.
Since early July, the central government has taken a string of extraordinary steps to stem the rout, including prohibiting major shareholders from selling stocks, suspending initial public offerings and investigating “malicious” short selling.
As of Tuesday, the securities watchdog said it had frozen 38 trading accounts for irregularities, including a trading account operated in China by the US hedge fund Citadel Securities.
After falling briefly in Tuesday morning trade, mainland stocks recovered and advanced steadily, with the benchmark Shanghai Composite Index closing 3.7% higher. The smaller tech-heavy Shenzhen Component Index rose 4.52%.
