China Clamps Down on Short Selling

China Clamps Down on Short Selling

The FINANCIAL -- China took another step to curb volatility in its stock markets late Monday, moving to clamp down on short selling in the country.

Under new rules, short sellers must wait at least one day to cover their positions and pay back loans used to buy shares. Previously, investors could cover their positions within the same day, a practice China's stock exchanges said tends to "add to abnormal volatility of stock prices and affect market stability."

The new rules may help discourage short selling because they effectively force investors to keep their bets open overnight and leave them vulnerable to any new stimulus measures introduced by Beijing before trading resumes, according to Nasdaq.

When shorting a stock, investors sell borrowed shares on the belief they can buy them back at a much lower price later on, pocketing the difference.

The short selling curbs, a few days after the government began cracking down on program trading, are the latest in a series of measures by Beijing aimed at propping up a stock market that has tumbled 30% since mid-June after a long bull run.

But Li Lei, an analyst at China Minzu Securities, said the revision is expected to have limited impact on the market, due to the small scale of short selling.

"Securities firms and listed firms have little incentive to develop short selling trade, for fear of dragging down stock prices," added Mr. Li.

Short selling remains a small portion of China's debt-fueled stock investing, making up just 3.5 billion yuan as of Monday, compared with 1.29 trillion yuan of margin financing loans, according to data provider Wind Information Co..

That balance is down from a record 10.31 billion yuan on April 9 and compares with a recent low of 1.9 billion at the end of January 2014.

The change prompted Citic Securities, the country's top brokerage by assets, and Huatai Securities, the fourth-largest broker, to temporarily suspend such trades altogether.

To be sure, short selling remains a small source of revenue for brokers.

A leading Shanghai-based brokerage firm has exhausted its supply of stocks available for short selling, according to people familiar with the matter.

Both retail and institutional investors are permitted to short shares in China. The latest regulations require new investors to have a daily balance of at least 500,000 yuan in securities in the past 20 trading days, disqualifying many smaller investors.

The clampdown on short selling comes a day after the China Securities Regulatory Commission, the country's securities watchdog, began to freeze several automated trading accounts. By Monday, 38 trading accounts on the Shanghai and Shenzhen Stock Exchanges had been frozen due to trading irregularities, including one account managed by U.S.-based hedge fund firm Citadel Securities.