China security market regulators have called on a few hedge funds to curb the short selling in its stock index futures market as the regulator seeks to stabilize a nosedive in the stock market, as per sources.
The blue chip companies CSI300 Index (.CSI300) was trading near five-year lows this week, initiating fresh concerns by the government to stabilize the falling capital market. A hedge fund manager told the press about receiving a call from China’s financial futures exchange, cautioning him against short selling, especially the “naked short selling” that should not be conducted for hedging purposes.
Another hedge fund manager told the press that he was asked by the exchange to not short sell stocks for speculative reasons. He said that, “shorting is profitable in a falling market, but if you get calls from the exchange, you get the message that you should no longer short sell to make a profit.”
The source spoke with Reuters on condition of anonymity.
On the other hand, neither the China Financial Futures Exchange (CFFEX), nor did the China Securities Regulatory Commission (CSRC), respond to Reuters request for comment.
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China stock market vows
China’s stock market plummeted by 13% in the year 2023 and extended its slide in the first month of 2024 as well, amid a deepening property crisis, flight of capital by foreign investors and a shaky economic recovery since covid-19 pandemic.
On Tuesday, CSRC chairman Yi Huiman pledged to stabilize the capital and stock market of China by using their full force. China’s state council, the cabinet, also vowed to bring new measures and implement them with full force to bring about confidence in the market.
The China stock regulators initially did not mention about the specific measures in their informal talk; However, they hinted towards putting a curb on short selling which proved to be true as they called on various hedge funds to restrict their activities.
Moreover, some individual investors were also pushed to loosen up their heavy short positions as soon as possible, according to the sources.
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What These actions means
An informal hint and then unwritten instructions from the China stock regulators came amid signs of a rising short selling trend in the equities market.
Futures contract on the small-cap CSI1000 Index due in Sept 2024 was on the ground on Monday, hitting its daily limit of 10%. Turnover of the futures contract also witnessed a spike.
The massive selling of futures contracts can be attributed partly to the risk management activities as billions of dollars worth of derivatives linked to Chinese stock indexes forced a cycle of selling in the futures and stocks.
Ben Bennett, APAC investment strategist for Legal and General Investment Management suspected that the ”policymakers would prefer markets to be more stable, but I doubt they plan to make huge unconditional injections into markets.”
“Now they want to suggest that it’s not a one-way bet for markets to go down. Hopefully this leads to a bit of stabilization now.”
China’s stock market showed a mixed trend in the initial trading session on Wednesday with the blue chip index going down by 0.4%, meanwhile Shanghai composite traded 0.11% above its last closing. Hong Kong’s Hang Seng also increased by 1.5%.
