China not trying to chill red-hot stock market, says regulator

SHANGHAI—A day after it warned small investors about trading risks and expanded the use of a mechanism investors can use to bet against stocks, China’s securities regulator moved to allay fears that it wants to kill a breathtaking rally in the country’s stock market.

Analysts said the abrupt nature of the China Securities Regulatory Commission’s actions betrays a dilemma faced by the regulator between cooling a market that has doubled over 12 months and causing panic among vulnerable retail investors that account for the vast majority of stock trading in China.

In a statement published Saturday evening, the commission said measures rolled out on Friday, including tightening rules on margin lending and promoting the use of short selling, aren’t aimed at clamping down on a red-hot market.

The measures are about “maintaining the healthy development of the market,” the CSRC said in the statement. “They aren’t intended to encourage short selling, let alone depressing the market…the market shouldn’t over-interpret the measures.”

In separate announcements late Friday, the CSRC banned a type of financing called umbrella trusts that have provided cash for margin trading, the practice of borrowing against the value of common shares held at a brokerage, and placed limits on margin trading for high-risk small stocks that trade over the counter rather than on exchanges.

In an apparent effort to take some heat off a soaring market, the CSRC also announced that it would allow fund managers to lend shares for short selling, or betting against stocks. To short a stock, an investor borrows shares and sells them, hoping the price will fall so that they can repurchase them and repay the loan with the cheaper shares and make a profit.

The Shanghai and Shenzhen stock exchanges also announced that they would make it easier for investors to engage in short selling by pushing for an increase in the supply of shares available for lending and increase the number of stocks whose shares can be borrowed.

Compared with the recently robust margin-financing business, which benefits from a rising market, short selling businesses have grown at a much slower pace in China because of difficulties in borrowing shares.

“The market has indeed risen too fast and the regulator clearly wants to clamp down on speculation and pierce the bubble. However, Chinese retail investors have a very fragile state of mind,” said Shen Meng, executive director of Chanson Capital, a boutique investment bank.

The Shanghai Composite Index, home to China’s biggest stocks, surged 6.3 per cent last week and has jumped 14 per cent this month. After years of listless trading, the index has doubled over the past 12 months.

By contrast, the small-company-rich ChiNext Price Index—up 73 per cent for the year when the week began—recorded its first weekly loss since January, dropping 3.5 per cent. Among its components are startups listed on the Shenzhen stock market.

Friday’s announcements raised fears of a selloff in China.

Rhetoric from regulators is particularly important in a market such as China’s, where economic fundamentals have become less relevant while policies and rumors are the main drivers behind price movements, analysts say.

On Friday, the CSRC warned small investors, who have been big drivers of the rally, not to borrow money or sell property to buy stocks, ratcheting up its rhetoric about the market.

Mainland investors opened stock-trading accounts at the fastest pace ever in the week ended April 10, and margin account balances reached a record 1.16 trillion yuan ($187 billion) as of Thursday, according to the Shanghai Stock Exchange.

“The authorities want a slow bull, not a mad cow,” said Mr. Shen.

The Shanghai gains have been fueled by value-seeking fund managers, yanking cash out of smaller companies whose prices they judge frothy in favor of larger companies that have been out of favor. The 50-largest Shanghai-listed companies are trading at 15 times earnings, compared with a record 50 times earnings for the CSI Smallcap 500 Index, Reorient Group says.

Though up 33 per cent this year, the ride hasn’t been smooth for the Shanghai Composite. After rallying 53 per cent last year, it had a flat January before resuming its climb. Last week’s launch of two new stock-index futures—based on the Shanghai Stock Exchange 50 A-Share Index and the CSI Smallcap 500—helped investors add positions in large caps while shorting small caps for a first time, analysts say.

That was a boost for Shanghai, where the 50-largest companies make up about half of the market capitalization. On Thursday, when the new futures contracts started trading, the index jumped 2.7 per cent, its largest one-day gain since late January. On Friday, it added 2.2 per cent to finish at 4287.30.