22 July 2019
The Shenzhen Stock Exchange and its Shanghai counterpart have imposed restrictions to curb short selling. Photo: CNSA
The Shenzhen Stock Exchange and its Shanghai counterpart have imposed restrictions to curb short selling. Photo: CNSA

Investor confidence in A-share markets remains weak

To stabilize the stock market, the Shanghai and Shenzhen stock exchanges have revised their rules to further restrict short selling of stocks.

Investors who borrow shares to sell them short must now wait one day (T+1) to repay the loan, instead of being able to cover the short position and return the shares on the same day as in the past.

Under the old T+0 practice, investors could trade shares several times within a day, which might “increase abnormal fluctuations in stock prices and affect market stability”, the exchanges said.

In response to the move, five mainland brokerages, including CITIC Securities (600030.CN), suspended margin trading on Tuesday.

The level of outstanding margin financing and short-selling volume has fallen to a new low since mid-March.

In fact, short-selling activity would naturally wind down in a sluggish stock market.

However, the new rules will weaken the role of short selling in risk management.

When the market was red-hot earlier this year, it was flooded with margin financing, and the authorities even intended to further expand short-selling activity.

While most investors need to be able to sell stocks short to protect their long positions during a market slump, the authorities are restricting them from doing so.

Anyway, the government has sent a clear signal for investors to buy and not sell amid the fragile market sentiment.

Investors should align themselves with the policy and give up short selling during market ups and downs.

Market sentiment is improving.

Essence Securities noted that there are various positive signals in the market and expects several trillion yuan of capital to flow into the market in the near future.

That includes pension funds, market rescue funds allocated to domestic funds and brokerages, and buying by listed companies.

Private equity firms still have fairly low holdings of stocks in comparison with their overall size of between 3 trillion yuan (US$480 billion) and 4 trillion yuan.

Market turnover in Shanghai and Shenzhen reached 906.5 billion yuan on Tuesday.

The market could gather momentum if this fresh capital comes in and individual investors also return.

It will still take some time to restore market confidence.

Policy plays a key role in buoying up market sentiment.

The National Development and Reform Commission, China’s top economic planning body, has unveiled various policy initiatives in recent weeks.

The NDRC recently released its three-year plan to strengthen the core competitiveness of the manufacturing sector.

The blueprint intends to foster innovative industrial alliances in rail transport, high-end shipping, marine engineering, industrial robotics, new-energy vehicles, modern farming machinery and so on.

As a result, the shipbuilding sector surged 9.6 percent, and almost all related stocks touched the daily up limit Tuesday.

Also, the information technology and machinery sectors soared 6 percent.

More than 600 stocks touched the daily up limit, and 2,195 stocks, or 97 percent of the total of 2,265 stocks, posted rallies.

The market is likely to hover around the trough for a while and return to the growth trajectory when confidence is back.

This article appeared in the Hong Kong Economic Journal on August 5.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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