Amidst turbulent conditions in the stock market, China takes steps to curtail short-selling activities by halting the lending of restricted shares.
Restricted shares, subject to specific sale and transfer restrictions often tied to corporate governance or employee compensation plans, will be suspended from lending starting January 29, according to reports from the China Securities Regulatory Commission (CSRC). These shares, typically unavailable for sale, can be lent for derivative contracts, including short-selling.
The CSRC stated that these measures aim “highlight fairness and reasonableness, reduce the efficiency of securities lending, and restrict the advantages of institutions in the use of information and tools, giving all types of investors more time to digest market information and creating a fairer market order.”
This move aligns with China’s efforts to control capital outflows. Previously, the country’s leading brokerage ceased lending stocks to retail investors and increased margin requirements for institutional investors following guidance from regulators. In October, the local commission introduced new regulations for hedge funds, limited shares lending by strategic investors, and bolstered supervision of arbitrage activities.
Short-selling, a strategy where investors borrow and sell shares with the anticipation of price declines, has faced increased scrutiny. China’s stock market encountered significant difficulties over the past year, with key indices like the CSI 300 and the MSCI China Index experiencing declines. Foreign investors also exhibited declining confidence in the Chinese market, selling off a substantial number of onshore stocks.
Nevertheless, amidst market challenges, China continues to invest heavily in pilot projects for its central bank digital currency (CBDC), the digital yuan. These initiatives include collaborations with foreign banks and leveraging the digital yuan for settling commodities transactions on Shanghai exchanges.