China tightens rules on short selling in a bid to boost stocks

Effective Oct 30, the Securities Regulatory Commission has increased the margin ratio for ordinary securities borrowing to at least 80 per cent and for hedge funds to 100 per cent.

Other rules coming into force on Oct 16 will restrict lending of shares by strategic investors and senior management and increase supervision of “various arbitrage activities”. The measures are expected to improve market sentiment and boost investor confidence, but the overall impact on the stock market may be limited, given that outstanding short-selling transactions only involve 0.13 per cent of mainland-listed shares that are in circulation.

Under the revised rules, investors and related parties who hold shares with transfer restrictions are not allowed to short-sell the company’s stock during the lockup period. The increase in the margin ratio may help to shrink the volume of securities-lending transactions and restrict related businesses at some financial institutions.