China Curbs Short Selling in Latest Attempt to Buoy Stocks

Don’t sell China short. Under penalty of law. 

Amid a broad market selloff, Beijing introduced new rules over the weekend that will effectively stamp out investors’ ability to sell shares short. If you can’t bet on yourself, we suppose not betting against yourself works, too.

Short End of the Stick

The S&P 500 closed at a record high earlier this month, after completing a 24% rally in 2023. But in China, the story is much different. The CSI 300 dropped 11% last year, marking the third straight year in decline, and is hovering near half-decade lows. Regulators have been struggling to slow the tide of selloffs since October. Last week, in a bid to stem capital outflows, restrictions were placed on access to funds that invest in offshore securities, while Premier Li Qiang — China’s second-highest-ranking public official behind President Xi Jinping — called for “more forceful” market intervention from the government.

The China Securities Regulatory Commission delivered, with new anti-short-selling rules aiming to stabilize the market going into effect on Monday:

• Per the new rules, investors who buy new shares will be barred from lending them out within an agreed “lock up” period, effectively closing off the mechanism used to bet against a stock.
• The move is similar to one China implemented during a similar period of market turmoil back in 2015, when activity from short-selling day traders was deemed as causing “abnormal fluctuations” in the market — a decision that ultimately failed to stem market losses in the following months.

Wait and See: Whether the new restrictions will have any impact is another matter. “While the short-selling ban is a government signal, it is only a band-aid with limited impact,” Gary Ng, senior economist at Natixis, told the Financial Times. “Whether China’s equity market can stabilize will still depend on confidence.” Either way, investors should buckle up for more new rules. In addition to the de facto short-selling ban, the China Securities Regulatory Commission promised more new regulations will come in March.