China tightens some trade restrictions on domestic, offshore investors
By Bloomberg News
China is tightening trading restrictions on domestic institutional investors and some offshore units as authorities fight to stem a deepening stock market crisis, people familiar with the matter say.
Officials this week imposed limits on some brokers’ cross-border total return swaps with clients, limiting a channel that can be used by China-based investors to short Hong Kong stocks, the people said, asking not to be identified while discussing a private matter. At the same time, some Chinese brokers who use the channel to buy mainland shares for their offshore units were told not to reduce their positions, the people said.
Some quantitative hedge funds will not be allowed to place sell orders at all from Monday, while other funds will not be allowed to reduce their equity positions in their leveraged market-neutral funds. These bets, known as the Direct Market Access strategy, are believed to have amplified the recent sell-off in small-cap stocks, the people added.
China is trying to stabilize markets after shares fell to a five-year low in chaotic trading on Friday. The latest steps add to the incremental steps taken by policymakers as they struggle to end a three-year rout that has wiped out some $7 trillion in value and undermined confidence in the world’s second-largest economy has affected.
In a statement Monday, the China Securities Regulatory Commission said it recently discovered several cases of stock market manipulation and “malicious short selling.” The regulator vowed to act quickly to put an end to illegal behavior that hinders stable stock market transactions and harms investors.
Representatives of the Shanghai and Shenzhen stock exchanges did not respond to requests for comment.
Weak economic data, simmering geopolitical tensions with the US, a worsening real estate crisis and an opaque crackdown on the financial sector have all weighed on investor sentiment. Margin calls and forced liquidations facing shareholders are emerging as key pressure points after the latest support pledge provided few details.
Shares recovered on Monday afternoon after the securities regulator said it will take steps to prevent risks arising from share commitments. The CSI 300 Index ended the day 0.7% higher, following an earlier decline of 2.1%. The indicators for small cap stocks limited losses but still closed deep in the red.
Hong Kong’s Hang Seng Index is down 9% this year after four straight years of losses, while the onshore benchmark CSI 300 Index is down almost 7% and trading at its lowest level since 2019.
Measures to limit selling may provide some short-term relief but could be counterproductive as investors worry about their ability to exit the market, said Michael Hirson, a Chinese economist at 22V Research in New York. Beijing could make large stock purchases, although this would be expensive and it is not clear that the issue has become urgent enough to do so, he added.
βThe net result is that they may muddle through with stopgap measures and hope that sales will take their course,β he said.
Chinese stocks with small and medium market capitalizations, which many quant funds trade, have been under particular selling pressure lately. The CSI 1000 index of small companies fell 6% on Monday, entering its seventh straight losing session.
The latest measures complement those taken to limit short selling, where investors bet on a fall in prices. China last week halted lending of certain stocks for short selling. Under the measures, strategic investors are not allowed to lend shares during agreed lock-up periods.
Bloomberg previously reported that state-owned Citic Securities Co. had stopped lending shares to individual investors and had increased requirements for institutional clients following so-called window guidance from regulators.
βThere is very little the CSRC can do to change the market,β said Neo Wang, director of China research at Evercore ISI in New York, adding that they are unlikely to go so far as to ban short selling .
The CSRC also vowed on Sunday to prevent abnormal swings, saying it would channel more medium- and long-term funds into the market and crack down on illegal activities, including insider trading.
The measures may prove insufficient to convince traders who have been repeatedly disappointed by the government’s piecemeal stimulus approach. Investors worry about a negative spiral in which technical selling pressure caused by margin calls and snowballing derivatives exacerbates the market’s downfall.
Meanwhile, Liu Yuhui, an academic at a government think tank, was quoted in a report as saying the nation should set up a stock stabilization fund as soon as possible to boost market confidence, with the aim of raising its size to 10 trillion yuan. ($1.4 trillion) or more.
In a separate statement on Monday, the securities regulator said it will guide brokers in adjusting their margin call levels and maintaining “flexible” liquidation lines, in a bid to ease pressure on the stock market and limit forced liquidations.
In another sign of how irritated some investors have become, hundreds of thousands of people flocked to a U.S. Embassy social media post discussing giraffe conservation to express their frustrations with the economy and falling stock prices. Chinese Internet users often struggle to find a place to express their grievances about the economy or government performance, with official reports from government agencies or media outlets usually disabling the comment function or showing only selected feedback.
First print: February 6, 2024 | 12:08 pm IST