China tightens trading curbs on domestic and foreign investors as stock rout deepens

SHANGHAI – China is tightening trading restrictions on domestic institutional investors as well as some offshore units as authorities fight to stem a deepening stock rout, according to people familiar with the matter.

Officials this week imposed caps on some brokerages’ cross-border total return swaps with clients, limiting a channel that can be used by China-based investors to short Hong Kong stocks, said the people. At the same time, some Chinese brokers that use the channel to buy mainland shares for their offshore units were told not to reduce their positions, the people said.

Some quantitative hedge funds meanwhile were banned from placing sell orders completely starting Feb 5, while others were barred from cutting stock positions in their leveraged market-neutral funds. These bets, known as a Direct Market Access strategy, are believed to have amplified the recent sell-off in small-cap stocks, the people added.

China is trying to stabilise markets after shares sank to a five-year low in chaotic trading on Feb 2. The latest moves add to the piecemeal steps policymakers have taken as they struggle to end a three-year rout that’s erased some US$7 trillion (S$9.4 trillion) of value and dented confidence in the world’s second-largest economy.

In another sign of how exasperated some investors have become, hundreds of thousands flocked to a social media post from the US embassy discussing giraffe preservation to vent their frustrations over the economy and slumping share prices. China’s internet users often struggle to find a venue to air grievances about the economy or government performance, with official accounts of state agencies or media usually either disabling the comment function or only showing selected feedback.

In a statement on Feb 5, the China Securities Regulatory Commission (CSRC) said it recently discovered multiple cases of stock market manipulation and “malicious short selling.” The regulator vowed to act quickly to stop illegal behavior that hinders stable stock market operations and hurts investors.

Representatives for the Shanghai and Shenzhen stock exchanges didn’t respond to requests for comment.

Weak economic data, simmering geopolitical tensions with the United States, a worsening property crisis and an opaque crackdown on the financial sector have all weighed on investor sentiment. Margin calls and forced liquidation faced by shareholders are emerging as key pressure points after the latest pledge of support provided few details.

Hong Kong’s Hang Seng Index has dropped 9 per cent this year after four consecutive years of losses while the onshore benchmark CSI 300 Index is down almost 7 per cent and traded near the lowest level since 2019.

Measures to limit selling could provide some short-term relief but may be counter-productive as investors worry about their ability to exit the market, said Michael Hirson, China economist at 22V Research in New York. Beijing could carry out large stock purchases, though it would be expensive and it’s not clear the issue has become urgent enough for them to do this, he added.

“The net result is that they may muddle through with stop-gap measures and hope that the selling runs its course,” he said.

Chinese stocks with small- and medium-sized market capitalisations, which many quant funds trade on, have been under particular selling pressure lately. The CSI 1000 index of small companies fell 6 per cent on Feb 5, entering the seventh consecutive losing session.

The latest curbs add to steps taken to limit short-selling, in which investors bet on a stock decline. China halted the lending of certain shares for short-selling last week. Under the measures, strategic investors aren’t allowed to lend out shares during agreed to lock-up periods.

Bloomberg reported earlier that state-owned Citic Securities had stopped lending stocks to individual investors and raised the requirements for institutional clients after so-called window guidance from regulators.

“There is very little the CSRC can do to turn the market around,” said Neo Wang, managing director for China research at Evercore ISI in New York, adding the chances are slim they would go as far as banning short-selling.

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