On January 28th, the China Securities Regulatory Commission (CSRC) announced two new regulatory actions to stabilize the Chinese stock market. The commission will suspend all lending of restricted stocks beginning on January 29th.
The CSRC also announced the readjustment of market-based applications for security refinancing from real-time to next-day availability will take effect on March 18th. The readjustment is aimed at limiting the efficiency of securities lending in the stock market.
The commission outlined two purposes for the regulatory rules: to increase fairness in the stock market, reduce the efficiency of securities lending, and to create a more equal market order.
The second intention is to enhance strict supervision of the market, strengthen the supervision of lending of restricted stocks; and to crackdown on illegal activities that use securities lending to reduce holdings and cash out.
Analysis
The new regulations are the latest attempt by the Chinese government within the past week to stabilize China’s stock markets after dramatic drops due to volatility. The prohibition on restricted stocks lending is to prevent Chinese traders from short-selling their shares that could increase pressure on the declining stock markets. The readjustment of applications availability also aimed at preventing traders from easily trading their shares on the Chinese stock markets. While the new regulations would likely have a positive effect on the stock markets, they would only have a limited impact on trying to stabilize China’s stock markets. The reason why is because the regulations do not solve the issues for the downturns in the stock market such as restore business, consumer, and investor confidence in the Chinese economy. Furthermore, the regulations do not solve other issues such as China’s ongoing real estate and shadow banking crises.