New | China stock markets ban same day margin lending in latest move to curb short selling
The central government has stepped up its efforts to reduce volatility in the stock market, with the two mainland bourses on Monday night imposing a ban on same day margin lending for short selling.
The central government has stepped up its efforts to reduce volatility in the stock market, with the two mainland bourses on Monday night imposing a ban on same day margin lending for short selling, while several leading brokerages said they would also suspend this type of trading.
The new rule prohibits investors from borrowing and repaying stocks within the same trading day, according to announcements on the websites of the Shanghai and Shenzhen stock exchanges. It was followed by statements by a number of the country’s biggest brokerages, including Citic Securities, that they would temporarily suspend short selling to comply with the rule changes and to control risks.
“They want to impose more stringent rules to make it harder for people to borrow money in an attempt to short sell stocks,” Louis Tse, director of VC Brokerage told the South China Morning Post. “There is always someone smart enough to find the regulatory loopholes and take advantage of them.”
The latest move marks another step by Beijing to crackdown on what it believes to be “malicious short selling” that allegedly contributed to the market turmoil, while the China Securities Regulatory Commission says it is targeting “automated trading” and “certain inter-market arbitrage trade” in its ongoing investigation into market manipulation.
Tse said the latest tightening move was linked to a probe by Beijing into automated trading, as regulators suspect some investors may have practiced high-frequency trading and distorted prices in the process. A total of 38 accounts have been frozen by Chinese securities regulators since last Friday due to “irregular trading,” “hedging” or automated trading that allegedly caused market volatility.
Short selling is a practice where investors sell shares they don’t own with the expectation that the price will fall so they can buy back the shares at a lower price. While short selling is commonly used as a trading strategy worldwide, it was singled out by Beijing as the cause of the prolonged mainland market rout.