Faced with the continuous decline of the Chinese stock market, the China Securities Regulatory Commission (CSRC) has taken active measures to stabilize the market. Firstly, it has suspended the lending of restricted shares, effectively limiting short selling operations. Secondly, it has adjusted the declaration of the marketization of securities lending and borrowing, further restricting the efficiency of securities borrowing and lending.
In recent times, both the Chinese and Hong Kong stock markets have experienced continuous declines. The Shanghai Composite Index, one of the three major indexes of A-shares in China, recently fell to a new low of 2735.37 points since April 2020. The CSI 300 Index also fell by 11% in 2023, marking the third consecutive year of decline. The Hang Seng Index in Hong Kong has already fallen by 10% this year, becoming the worst-performing major index in Asia.
Against this backdrop, it has been reported that the Chinese government will implement multiple measures to protect the market, including the establishment of a 2 trillion yuan stock market stabilization fund. In order to reduce volatility, the CSRC officially announced yesterday the full suspension of the lending of restricted shares starting from today (29th).
This means that investors are not allowed to lend their shares for short selling during the agreed lock-up period. The CSRC stated that this move aims to create a more fair market order, limiting the advantage institutions have in using information and tools, and allowing various types of investors more time to digest market information.
In addition, the second adjustment of this system is to change the declaration for the marketization of securities lending and borrowing from “immediately available” to “next day available” starting from March 18. In the past, Chinese investors could “immediately” deliver the securities they lent through the declaration to the brokerage firms for short selling during trading hours. The new arrangement, which allows securities to be used for short selling only from the next day, restricts the efficiency of securities borrowing and lending.
These measures highlight the Chinese government’s efforts to regulate short selling in order to stabilize the stock market during the recent downturn. The CSRC stated in its announcement that this optimization of the securities borrowing and lending mechanism primarily reflects the following regulatory intentions:
The CSRC’s efforts over the weekend have brought positive effects to the A-share market. Although this move has limited impact on the overall market, it demonstrates a clear determination to stabilize the market, according to a chief analyst at a securities firm.
The Chairman of Guangdong Xiaoyu Investment, Li Shiyu, believes that short selling has a greater impact on investors in a bear market. The suspension of strategic investment stock lending by regulatory authorities reflects their attention to the market and investor-oriented attitude. This may release pressure on the prices of newly-listed stocks and bring new profit opportunities to the market, especially before the Spring Festival.
However, according to experts quoted by the Financial Times, there are still doubts about the effectiveness of the ban. Gary Ng, Senior Economist at Natixis, a French foreign trade bank, believes that overall, China has shown an attitude of policy support, and the market is now focusing on further substantial support measures to achieve an economic rebound.
Another piece of bad news for the Chinese stock market is that the Hong Kong court has formally issued a winding-up order to the heavily indebted Evergrande Group. Analysts point out that Evergrande’s liquidation will pose a major setback to China’s economic recovery and further shake its financial system. Following the announcement of the news, Evergrande’s stock fell by more than 20%, and other affiliated companies also suspended trading, with Evergrande Auto (0708) falling by 18% before the suspension and Evergrande Property (6666) falling by 2.5%.
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