Equity curbs herald capital market reform
China fully suspended the lending of restricted shares on Monday, indicating that regulators are taking serious steps to restore investor confidence, with additional measures anticipated soon, experts said.
The move will help level the playing field for smaller investors while limiting short selling, as part of the unfolding fundamental reforms that prioritize the interests of investors, they said.
Restricted shares, usually owned by listed company employees and early-stage investors, are subject to restrictions on transfer in a specified period to prevent excessive volatility or insider trading.
The China Securities Regulatory Commission said on Sunday that it would temporarily halt the lending of all restricted shares, effective from Monday, to strengthen supervision and strictly crack down on behaviors that use securities lending as a cover for illegal shareholding reduction.
The move came just after the commission assured on Friday that it will optimize regulations on securities lending and other areas, indicating that it is taking concrete, quick steps to realize a shift in regulatory focus from facilitating financing to prioritizing investors' interests, experts said.
"It's a sign that the CSRC is making rules to level the playing field for small investors and is an answer to recent calls by market participants to stop trades of this nature," said Hong Hao, chief economist at GROW Investment Group.
Hong added the move will alleviate downward pressure on the A-share market as short-selling turnover remained relatively high before this new rule.
The practice of strategic investors lending their shares in the securities refinancing market has ignited controversy as it could facilitate short selling, intensify downward market pressure and put retail investors in a disadvantaged position.
In September, key employees of Shandong Golden Empire Precision Machinery Technology Co Ltd lent their holdings to other investors for short selling via the securities refinancing market on the company's very first trading day in Shanghai, triggering public discontent.
Xu Kang, research head and chief analyst for the financial industry at Hua Chuang Securities, said while Monday's suspension might not have a major direct impact on the whole A-share market, it is still of significance in terms of policy implication.
In October, the CSRC refined relevant rules, making restricted shares owned by listed company employees ineligible for use in securities lending.
Monday's move, Xu said, extends the ineligibility to restricted shares held by strategic investors who are not listed company employees. Such shares' estimated worth is about 324.4 billion yuan ($45.2 billion), equivalent to only about 0.99 percent of the A-share market's total free-float capitalization.
The real significance of Monday's action lies in the policy signal it delivers. "It sends out a potent policy signal, highlighting the regulator's firm commitment to creating an investor-centric market," Xu said.
Also, in a bid to fairly safeguard the interests of smaller investors, securities finance firms that borrow shares will need to wait one day before offering them to brokerages for clients' short selling, instead of the stock being immediately available, starting from March 18, the commission said.
A report from Guotai Junan Securities said the new rule means that the information of securities being borrowed is disclosed on the first day, and only from the next day onward can they be used for short selling, providing ample time for various investors to digest the information.
The CSRC decided at its two-day annual work conference through Friday that it will optimize rules regarding issuance, pricing, quantitative trading and securities lending to strengthen the protection of smaller investors in line with an investor-centric mindset.
In a sign that the A-share market still needs more policy support to revive investor confidence, the benchmark Shanghai Composite Index closed 0.92 percent lower at 2883.36 points on Monday, despite the new restrictions on short selling.
Luo Zuanhui, an analyst at Shenwan Hongyuan Securities, said additional supportive measures are expected to be gradually unveiled, covering areas like listed company governance, the inclusion of market capitalization in the evaluation system for central State-owned enterprises and incentives for medium and long-term funds to invest in A shares.