China Bans Stock Selling At Market Open, Close; Limits Shorting

One day after Beijing announced it would suspend one of the biggest domestic quant funds for “aggressive” selling, namely dumping $357MM in A-shares in just one minute, a panicked China where public sentiment is ever more adversely impacted by the country’s relentless stock rout, took the latest desperate measure to prop up the market on Wednesday when it banned major institutional investors from reducing equity holdings at the open and close of each trading day, part of the government’s most forceful attempt yet to prop up the nation’s imploding $8.6 trillion stock market which recently dropped to levels not seen since the early 2000s.

According to Bloomberg, the order – which from China’s securities watchdog – was recently delivered to major asset managers and the proprietary trading desks of brokerages. The China Securities Regulatory Commission (CSRC), led by newly appointed Chairman Wu Qing, has also created a task force with the nation’s stock exchanges to monitor short selling and issue warnings to firms that profit from the wagers.

While increasingly panicked Chinese authorities have been ratcheting up curbs on bearish trades for months, the ban on net selling at the open and close represents a notable tightening of the government’s grip on market activity that risks upending popular strategies used by hedge funds and other institutional investors, especially those who short stocks. Firms affected by the ban are unable to sell more shares than they buy during the first and last 30 minutes of trading, the people said.

Bloomberg adds that while it remains unclear how widely the ban is being applied across the financial industry, and there’s no indication it will affect individual investors who account for a large portion of volume in Chinese stocks, the sidelining of major institutions during two of the most closely watched parts of the trading day may make it easier for government-backed funds to influence the market — especially the closing levels for benchmark indexes.

With Chinese stocks plunging for the past three years, and wiping out over $6 trillion in value, culminating with popular anger at the seemingly endless destruction of wealth which ignored every little thing China threw at it in hopes of slowing it down….

… Beijing has finally done something to effectively contain the market implosion in appointing Wu, best known for his tough clampdowns on brokerages as a CSRC official in the mid-2000s; the top regulator is increasingly resorting to more drastic measures to prevent the stock-market slump from extending into a fourth year.

The selloff, which pushed China’s benchmark CSI 300 Index to a five-year low earlier this month, has become one of the most visible symbols of waning confidence in President Xi Jinping’s ability to revive an economy struggling with deflation and a persistent property crisis.

While such panicked attempts to restore confidence never work in the long run and will eventually require an even more massive stimulus to prevent another collapse, the recent steps to contain the selling have generated modest results and The CSI 300 rose 1.4% on Wednesday, extending its rebound from this year’s closing low to 8.7%. It’s still down about 17% over the past year.

Beside the trading curbs, Bloomberg also notes that China is actively preparing to ban shorts as some brokerages have been asked to recall stock loans to clients for shorting purposes, people familiar with the matter said. Some quantitative hedge funds are still banned from cutting equity positions in their leveraged market-neutral funds — a strategy known as Direct Market Access that was halted in early February, one person added. Authorities have also given so-called window guidance to hedge funds not to place concentrated sell orders.