China Tightens Rules on Short Selling in a Bid to Boost Stocks

(Bloomberg) — China is tightening curbs on short-selling activities as authorities step up efforts to shore up a struggling stock market.

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The Securities Regulatory Commission said with effect from Oct. 30, hedge funds wishing to short sell a stock must hold 100% of the value of the transaction in their account while other investors need to have at least 80%. Other rules that came into force Monday restrict lending of shares by strategic investors and senior management and increase the supervision of “various arbitrage activities,” it added in a statement on Saturday.

Beijing is pulling out all the stops to reverse a downdraft in equities after global funds offloaded a record 89.7 billion yuan ($12.3 billion) of onshore stocks via trading links with Hong Kong in August. It remains to be seen if the new rules and other measures unveiled in recent weeks will be enough to prop up the benchmark CSI 300 Index, which has fallen more than 6% this year as China’s growth faltered.

The measures will help “improve market sentiment and boost investor confidence,” China International Capital Corp. analysts including Li Peifeng wrote in a note on Monday. But the overall impact on the stock market might be “relatively limited,” given that outstanding short selling transactions only involve 0.13% of mainland-listed shares that are in circulation, they said.

Under the revised rules, investors and related parties who hold shares with transfer restrictions are not allowed to short sell the company’s stock during the lockup period, the regulator said. The increase in the margin ratio may help to shrink the volume of securities-lending transactions and restrict related businesses at some financial institutions, according to the analysts.

READ: China’s Newest Move to Support Stocks Seen Limited in Impact

The latest guidelines failed to reverse the broader negative sentiment in equity markets on Monday, with the CSI 300 Index closing 1% lower while a gauge of Chinese equities listed in Hong Kong retreated 1.1%.

(Updates with closing stock levels in the final paragraph)

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