China Curbs Short Selling

China Curbs Short Selling

The FINANCIAL -- China shares ended higher on August 4 ,after officials announced fresh steps to rein in short selling, while commodities weakness spread to some Asian currencies, including the Malaysian ringgit.

The Shanghai Composite Index ended up 3.7% at 3756.54 and the smaller Shenzhen Composite gained 4.8% to 2150.95. The small-cap ChiNext board surged 6.1% to 2546.16.

Hong Kong's Hang Seng Index ended flat while a gauge of Chinese companies listed in the city is up 0.6%.

Chinese regulators are continuing to roll out rescue measures to stem a 27% decline in equities since mid-June, according to Nasdaq.

Late Monday, the Shanghai and Shenzhen stock exchanges announced revised rules on short selling to curb volatility, according to statements published on their official websites. But analysts question the effectiveness of the move given the limited scope of short selling in China's market.

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 regulators said added to " abnormal volatility of stock prices."

Short selling allows investors to sell borrowed shares on the belief they can buy them back at a much lower price later on, pocketing the difference. It remains a small portion of China's debt-fueled stock investing, or margin loans, making up just 3.48 billion yuan ($560.28 million) as of Monday, compared with 1.29 trillion yuan of margin-financing loans, according to Wind Information Co.

Short-selling levels have fallen from record 10.31 billion yuan on April 9, though they have risen from a recent low of 1.90 billion yuan at the end of January 2014. The limited scale means revised rules aren't likely to have a big impact on market swings, said Li Lei, an analyst at China Minzu Securities.

Nevertheless, officials' moves could help repair investor sentiment. "Short selling has been a concern by many retail investors and they are likely to see this development as a net positive for the market," said Gerry Alfonso, director of trading at Shenwan Hongyuan Securities.

On Tuesday, Citic Securities Co., China's largest brokerage firm by assets, and Huatai Securities Co., China's fourth-largest broker, temporarily suspended their short-selling businesses, effective immediately, according to separate company statements.

The announcements follow Chinese regulators' deepened scrutiny of automated trading in recent days. A total of 38 trading accounts on the Shanghai and Shenzhen Stock Exchange have been frozen as of Monday over trading irregularities, including one account managed by U.S.-based hedge fund firm Citadel Securities.

Meanwhile, a slide in prices of commodities--from oil to gold and copper--has continued to pressure some Asian currencies.

A slump in oil, which had fallen below $50 a barrel Monday, stands to threaten Malaysia's oil-related revenues and deals another blow to the battered ringgit. The currency is already one of the worst-performing in emerging markets, down 10.6% so far this year.

The ringgit also has struggled amid a continuing investigation into the troubled state investment fund 1Malaysia Development Bhd., which has hurt investor confidence. Yields, which move inversely to prices, on Malaysia's five-year government bonds have surged 0.139 percentage points since the beginning of last week to 3.64%, their highest in over a month.

Malaysia's ringgit hit 3.8685 against the U.S. dollar Tuesday, down as much as 0.48% from 3.8498 late Monday in Asia, when it fell as much as 0.9% against the U.S. dollar. Expectations of a U.S. rate increase later this year, which could incite investors to shift to less-risky assets, adds another layer of uncertainty.

"There's going to be further pressure on the ringgit now that there's no support from the central bank," said Khoon Goh, a currency strategist at ANZ Bank in Singapore, referring to the central bank exhausting its foreign-exchange reserves to stem the ringgit's rapid decline. "The fall in oil prices is not going to help the ringgit either."

Elsewhere, the Singaporean dollar hit its weakest level in 4 1/2 months against the U.S. dollar.

Brent oil futures were up 1% to $50.03 a barrel in Asia trade, recovering somewhat after data Monday showed a gauge of Chinese factory-floor activity slumped to a two-year low. That data also hurt industrial metals like copper and aluminum, which have fallen to six-year lows.

Gold prices were down 0.2% at 1087.50 an ounce in Asia trade, with the yellow metal hitting five-year lows in recent days.

Stock markets in the Asian region were roughly flat. The Nikkei Stock Average down 0.1%, South Korea's Kospi was up 1% and the S&P ASX 200 was up 0.3%.

In Australia, the central bank kept its cash rate steady at a record low 2.0% Tuesday, but kept the door open for rate cuts later this year. A protracted commodities slump has pressured Australia's resources-dependent economy, and nonmining investment continues to lag.

The Australian dollar strengthened after the announcement, last at $0.7374, compared with $0.7286 earlier Tuesday, after the central bank said the local dollar is adjusting to weaker commodity prices. Earlier, Gov. Glenn Stevens had warned the Aussie should and would weaken further. The currency has recent fallen to a six-year low.