China has banned major institutional investors from reducing equity holdings at the open and close of each trading day, part of the government’s most forceful attempt yet to prop up the nation’s US$8.6 trillion ($11.53 trillion) stock market.
The order from China’s securities watchdog was recently delivered to major asset managers and the proprietary trading desks of brokerages, according to people familiar with the matter, who asked not to be named because they weren’t authorized to speak publicly. The China Securities Regulatory Commission, led by newly appointed Chairman Wu Qing, has also created a task force with the nation’s stock exchanges to monitor short selling and issue warnings to firms that profit from the wagers, the people said.
While authorities have been ratcheting up curbs on bearish bets for months, the ban on net selling at the open and close represents a notable tightening of the government’s grip on market activity that risks upending popular strategies used by hedge funds and other institutional investors. Firms affected by the ban are unable to sell more shares than they buy during the first and last 30 minutes of trading, the people said.
It’s unclear how widely the ban is being applied across the financial industry, and there’s no indication it will affect individual investors who account for a large portion of volume in Chinese stocks. Still, the sidelining of major institutions during two of the most closely watched parts of the trading day may make it easier for government-backed funds to influence the market — especially the closing levels for benchmark indexes.
The CSRC didn’t immediately respond to a faxed request for comment.
Known for his tough clampdowns on brokerages as a CSRC official in the mid-2000s, Wu is resorting to more drastic measures to prevent the stock-market slump from extending into a fourth year. The selloff, which pushed China’s benchmark CSI 300 Index to a five-year low earlier this month, has become one of the most visible symbols of waning confidence in President Xi Jinping’s ability to revive an economy struggling with deflation and a persistent property crisis.
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The CSI 300 rose 1.4% on Wednesday, extending its rebound from this year’s closing low to 8.7%. It’s still down about 17% over the past year.
In addition to the trading curbs, some brokerages have been asked to recall stock loans to clients for shorting purposes, people familiar with the matter said. Some quantitative hedge funds are still banned from cutting equity positions in their leveraged market-neutral funds — a strategy known as Direct Market Access that was halted in early February, one person added.
Authorities have also given so-called window guidance to hedge funds not to place concentrated sell orders, another person said.
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Quant Crackdown
China has focused part of its clampdown this week on quantitative trading after a major hedge fund, Ningbo Lingjun Investment Management Partnership, sold a combined US$357 million in shares within a minute Monday after markets opened at 9.30am.
The move, deemed as “disrupting normal trading order,” prompted the Shanghai and Shenzhen stock exchanges to freeze its accounts for three days in an unusually harsh punishment. The bourses also pledged to tighten supervision of quantitative trading.
While quant trading can help with market liquidity and price discovery, such trades have “obvious technology, information and speed advantages” over smaller investors and can “amplify market volatilities” at certain points, the exchanges said.
The CSRC held a series of seminars with investors over the past week, vowing to heed suggestions and even criticism to promptly address concerns in a rare gesture.
The regulator is also studying measures to tighten initial public offering approvals, promote dividend payouts, and crack down on financial fraud, local media China Securities Journal reported Tuesday. It will try to speed up approvals for equity funds and guide more medium-to-long-term investment vehicles into the stock market, it added.
