February 21, 2024

China’s biggest brokerage restricts short sales after stock rout

China’s largest brokerage has suspended short selling for some clients in mainland markets amid a deepening rout in the nation’s stocks, according to people familiar with the matter.

State-owned Citic Securities Co. has stopped lending stocks to individual investors and raised the requirements for institutional clients earlier this week after so-called window guidance from regulators, said the people, asking not be identified discussing a private matter.

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Citic Securities didn’t respond to a request for comment.

Chinese shares have extended declines this year with no sign of a let-up after a harrowing 2023, and the Shanghai Composite Index is having its worst start to a year since 2016. While it’s not immediately clear how many brokerages are restricting short sales, the move signals authorities’ eagerness to put a floor under the market, after earlier efforts including state buying of bank shares failed to lift sentiment.

In another sign of official attempts to boost stock prices, trading activity in some major exchange-traded funds surged on Thursday — pointing to potential buying by state institutions.

Beijing has a history of limiting short selling at times of market volatility, with an aim to avert a downward spiral in stocks. As recently as October, regulators tightened rules on short selling to halt declines.

The strategy hasn’t always worked. In its last stock boom and bust cycle in 2015, China restricted short-selling to force out day traders, whose selling and buying of stocks on the same day were seen as fueling “abnormal fluctuations.” The market continued its slide over the following months.

The moves in October, and a later order in November for brokerages to cap the size of their securities lending businesses, also failed to arrest a slide in stocks. The value of shares sold short has dropped 61% from a 2021 peak to 67 billion yuan ($9.3 billion) on Wednesday, its lowest since August 2020, before a mild increase on Thursday.

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The benchmark Shanghai Composite Index on Thursday dipped below the key 2,800 psychological level to its lowest since April 2020, before recovering some ground at the close. That contrasts with a rally in Japanese stocks, which have seen frenzied ETF purchases by Chinese investors. The market capitalization gap between China and Japan has narrowed to the lowest since July 2020.