China Suspends Restricted Shares Lending to Eradicate Short-Selling and Stock Market Turbulence
On Monday, January 29, the China Securities Regulatory Commission declared the suspension of restricted shares’ lending to avert short-selling. The securities regulator halted restricted shares lending to end the stock market turbulence.
The CSRC revealed in its WeChat account that the restricted shares are now subject to sale and transfer restrictions.
The restrictions often target corporate governance policies or extend to influence employee compensation plans, thereby limiting sales. Alternatively, the restrictions may arise through imposing lent for the traders involved in derivatives contracts such as short-selling.
A review of the CSRC’s statement shows that the new rules aim to restore fairness and reasonableness, whose absence has led to market turbulence.
China Weighs Capital Outflow Restriction
The new rules conveyed by the CSRC target to erode the prevailing efficiency in securities lending. Also, the restrictions target eroding the institutions’ advantages in processing information and utilizing tools. By doing so, all investors will have time to digest the available market information, leading to a fairer market order.
China is weighing the move to restrict capital outflows. A recent Bloomberg publication indicates that such would replicate a previous move where China’s leading brokerage halted lending storks to retail investors.
The Bloomberg publication reports that the country’s leading brokerage firm also increased the requirements targeting institutional investors. The January 22 policy adjustment aimed to comply with the window guidance offered by the regulators.
China Stock Market Battling Increased Turbulence
Efforts to restore fair market order are evident in October’s initiative when the local Commission outlined new rules for the hedge funds. The new regulations restricted the shares lending executed by strategic investors coupled with heightened supervision for arbitrage activities.
Short-selling involves a financial strategy allowing the investor to borrow shares of a particular stock to sell on the market, anticipating that the stock’s price will decline. The strategy is deployed by investors believing that a particular stock is overvalued and will soon decline to correct the price-value variance.
China’s stock market has, over the past 12 months, confronted significant challenges. The struggles are evident in the CSI 300 Index benchmark, which declined by 11% last year. The MSCI China Index has also plunged 10% since the onset of this year in a pattern replicating the 2022 and 2021 occurrences, when it fell by 23.6% and 22.8%, respectively.
The market turbulence witnessed in China is significantly eroding foreign investors’ confidence. The South China Morning Post reports that foreign investors admit a waning decrease in the market. The publication reports that non-Chinese investors offloaded over 170 billion yuan, translating to US$23.4 billion of onshore stocks in the July to November window.
Despite the market challenges, China has recently invested heavily in pilot projects towards the central bank digital currency (CBDC). The digital yuan initiative has seen China realize integrations with foreign banks.
A recent disclosure of the digital yuan initiative revealed increased use of digital yuan in settling commodities transactions within the Shanghai exchanges.
China Elevates Digital Yuan Use
China is realizing a critical milestone in its digital yuan initiative, as revealed by the Shanghai Securities News publication on Monday, January 29. The publication reports that a local infrastructure company raised $350 million using digital yuan for the latest technology innovation bond.
Monday’s article by Shanghai Securities News disclosed that the Shandong Hi-Speed Group issued the first batch of the technology innovation corporate bond and duly listed it on the Shanghai Stock Exchange.
The move by Shandong Hi-Speed Group to raise ¥2.5 billion, translating to $350 million in CBDC, sets a precedent for the subsequent financial products. Besides, issuing the technology innovation bond sets a record for the low coupon rate of 2.94%, featuring a 3+N-year term within the Shandong province.
Shandong is publicizing the comprehensive adoption of China’s CBDC by upgrading the affiliated toll stations to accept digital yuan payments. The bond issuance in digital yuan positions China as a leading jurisdiction in the uptake of CBDC.
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