China tightens stock market rules after sell-off


A Chinese investor looks at screens showing stock market movements.

By Mariko Oi

Business reporter

China has tightened its financial industry rules as the government tries to halt a deepening sell-off in the world’s second largest economy.

Nearly $6tn (£4.7tn) has been wiped off Chinese and Hong Kong stocks since their most recent peak three years ago.

The China Securities Regulatory Commission (CSRC) says the measures will create “a fairer market order”.

Under the new rules limits will be put on so-called “short-selling” from Monday.

Short selling is when a trader bets that a share or other asset will fall in value. They borrow the asset and sell it immediately with the aim of buying it back later at a lower price and keeping the difference.

Defenders of short selling say it can play an important part in financial markets, by helping find the true value of an asset.

However, some critics see short selling as a ruthless trading strategy that undermines companies.

The latest announcement by the CSRC comes after a series of informal measures introduced by the regulator over the last year did little to shore up financial markets.

The CSRC said that following “a complete suspension of the lending of restricted stocks”, which takes effect today, further limitations on securities lending will be introduced from 18 March.

Last week, the country’s premier Li Qiang asked authorities to take more “forceful” measures to stabilise share prices.

The sell-off in China’s stock market comes as some investors are concerned that the country’s economy could face a long period of slow economic growth.

Central to China’s economic problems is its property market. For two decades, the sector boomed and accounted for a third of the country’s entire wealth.

But when the government put limits on how much developers could borrow in 2020, they started owing billions which they could not pay back.

When property giant Evergrande defaulted in 2021, after missing a crucial repayment deadline, it triggered the current crisis.

On Monday, the firm was ordered to liquidate by a court in Hong Kong, sending its shares down by more than 20% before trading in them was suspended.

The real estate sector’s troubles have also revealed issues faced by the country’s so-called “shadow banks” which have lent billions of dollar to developers.

The shadow banks operate in a very similar way to traditional banks but are not subject to the same regulations.

In November, Chinese officials launched an investigation into “suspected illegal crimes” at one of the country’s biggest shadow banks, Zhongzhi Enterprise Group, which filed for bankruptcy and earlier this month.

There are also a number of indications that China’s once-booming economy is slowing sharply.

Official figures show the economy expanded by more than 5% in 2023. While that is stronger growth than many other major economies it is much lower than China saw before the pandemic.

Meanwhile, the country’s exports, which have been a major contributor to its growth, fell last year.

At the same time, youth unemployment hit a record high and local government debt has jumped.

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