China halts restricted shares lending amid market turbulence

The Chinese securities regulator has announced another move to limit short-selling activities amid stock market turbulence. 

The China Securities Regulatory Commission (CSRC) reportedly announced on its WeChat account that it will suspend the lending of restricted shares starting Jan. 29.

Restricted shares are subject to certain sale and transfer restrictions. These restrictions are often imposed for corporate governance policies or as part of an employee compensation plan, therefore limiting their sale. However, it can be lent for traders engaging in derivatives contracts, including short-selling.

As per the CSRC’s statement, the new rules are intended to “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.”

China has been weighing on limiting capital outflows. In a previous move, the country’s largest brokerage stopped lending stocks to retail investors and raised margin requirements for institutional investors on Jan. 22 as a result of window guidance from regulators, Bloomberg reported.

Shanghai Stock Exchange Composite Index performance over the past year. Source: Google Finance

Another initiative took place in October when the local commission disclosed new rules for hedge funds, restricted shares lending by strategic investors and increased supervision of arbitrage activities.

Short-selling is a financial strategy where an investor borrows shares of a stock and sells them on the market, hoping the stock’s price will fall. This strategy is used by investors who believe a stock is overvalued or due for a decline.

Over the past year, China’s stock market has faced significant challenges. The CSI 300 Index benchmark declined by 11% in 2023, while the MSCI China Index fell almost 10% this year after falling 23.6% in 2022 and 22.8% in 2021.

Additionally, foreign investors have shown a significant decrease in confidence in the Chinese market, as reported by the South China Morning Post. Non-Chinese investors sold over 170 billion yuan (US$23.4 billion) worth of onshore stocks between July and November last year.

Despite market challenges, China is heavily investing in pilot projects for its central bank digital currency (CBDC) — digital yuan. Among the created use cases for the technology are integrations with several foreign banks, as well as using the digital yuan to settle commodities transactions on Shanghai exchanges.

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