China Tightens Trading Rules, Eyes Market Stability

CSRC Tightens Rules on Short Selling and High-Frequency Trading; Securities Lending Suspended from July 11

By Mackenzie Crow

7/10, 08:31 EDT

Key Takeaway

  • The China Securities Regulatory Commission (CSRC) will tighten rules on short selling and high-frequency trading, effective July 22, to stabilize the market.
  • Investors are closely watching the upcoming Third Plenum for policy announcements that could impact China's struggling stock market and key sectors like electric vehicles and quantum technology.
  • Potential reforms in fiscal systems and SOEs may benefit companies such as Servyou Software Group Co., China Construction Bank Corp., and China Longyuan Power Group.

Regulatory Crackdown on Short Selling

The China Securities Regulatory Commission (CSRC) has announced new measures to tighten rules on short selling, high-frequency trading, and securities lending. This move aims to curb improper arbitrage and maintain market stability. Starting July 22, mainland stock exchanges will increase margin requirements for short selling. Additionally, China Securities Finance Corp., the country's largest stock lending provider, will suspend its securities lending business from July 11, with outstanding contracts to be settled by the end of September.

These measures are part of a broader effort by the CSRC to stabilize the stock market amid ongoing volatility and sluggish returns. The regulator emphasized the need for strengthened daily supervision and timely adjustment measures to enforce rules against illegal activities. "The market also is in need of strengthened daily supervision and other adjustment measures in a timely manner," the CSRC stated.

Anticipation for the Third Plenum

Next week, China will hold its Third Plenum, a high-profile gathering of the country's top leaders, which occurs roughly every five years. This event is expected to provide significant insights into Beijing's economic and market policies. Investors are keenly watching for any announcements that could impact the struggling stock market, which has been in bear-market territory.

"The market's direction will be defined by how convincing the policies are perceived by investors as addressing the structural slowdown in growth and the challenges in the real estate sector," said Gary Dugan, CEO of The Global CIO Office. The MSCI China Index has entered a technical correction, and the CSI 300 Index has experienced its longest losing streak since early 2012, capping seven weeks of losses last Friday.

Historically, the performance of the Shanghai Composite Index one week and one month after previous Third Plenums has often been lackluster. However, Yifan Hu, Chief Investment Officer for Greater China at UBS Group AG, believes that the meeting, along with earnings progress, could catalyze an expansion in valuations.

Sectoral Focus and Potential Reforms

Several sectors are under the spotlight as traders and analysts anticipate the outcomes of the Third Plenum. Xi Jinping's campaign to foster "new productive forces" is expected to gain attention, particularly in areas like electric vehicles, spaceflight, and quantum technology. Barclays strategists Kaanhari Singh and Yingke Zhou noted that further efforts to gain dominance in high-tech manufacturing could benefit stocks in these sectors.

Potential fiscal and tax system changes may also boost information-system development. Companies like Servyou Software Group Co., Pansoft Co., and Beijing Join-Cheer Software Co. have rallied in anticipation of these reforms. "There are investment opportunities in fiscal and tax digitalization-related fields," stated AVIC Securities Co. analysts, including Zou Runfang.

State-owned enterprises (SOEs) are another area of focus, with hopes for increased efficiency and structural boosts in return on equity and valuations. Top SOEs in traditional banking, telecom, and insurance industries, such as China Construction Bank Corp., China Mobile Ltd., and China Life Insurance Co., are expected to benefit.

China's power stocks have also performed well this year, driven by electricity price hikes and investor preference for high-dividend-paying SOEs. Possible reforms to boost renewable energy usage and market mechanisms for price setting could further benefit companies like Pinggao Electric Co., XJ Electric Co., and China Longyuan Power Group.