Positive government action in China, which seems to have influenced investor sentiment, resulted in shares ending higher on the main Chinese stock markets.
While none of the fundamental factors affecting actual stock values have changed appreciably, the government move in changing the rules with regard to short selling appears to have convinced many investors that official intervention will assist in bringing about market stability.
The specific change to the rules means that investors selling short will have to wait a minimum of one day to cover their positions and to pay back margin loans used to buy shares. In the past, investors were able to cover their position on the same day which officials believe caused excessive volatility of stock prices.
The practice of short selling enables an investor to sell borrowed shares in the belief that they will be able to buy them back later at a lower price, profiting on the difference.
According to Wind Information Co., short selling comprises a small part of margin funded stock investing, totaling 3.48 billion yuan ($560.28 million) at Monday's date compared to 1.29 trillion yuan in margin loan financed investments.
Short selling, which was at a low level of 1.90 billion yuan at end January 2014, had increased to a record 10.31 billion yuan on 9 April, has fallen off in the recent past. Li Lei, an analyst at China Minzu Securities says that the new rules will have a limited impact on the market in view of the low level of short selling.
Gerry Alfonso, director of trading at Shenwan Hongyuan Securities says, “Short selling has been a concern by many retail investors and they are likely to see this development as a net positive for the market.”
In a response to the new rules together with greater official scrutiny of automated trading recently, Citic Securities Co., China’s largest brokerage firm measured by assets, and Huatai Securities Co., China's fourth largest broker, both temporarily suspended their short selling business on Tuesday.
Following on the increased scrutiny, 38 trading accounts on the Shenzhen and Shanghai Stock exchanges were frozen on Monday over trading irregularities. Included in that number was Citadel Securities, a U.S. based hedge fund firm.
Longer term investor reaction to the new rules and the effect they will have on stabilizing the markets remains to be seen.