China's Securities Regulators Urge Hedge Funds To Curb Short Selling Amid Market Turmoil: Report

In an attempt to stabilize the plunging stock market, China’s securities regulators have reportedly reached out to hedge fund managers, advising them to limit short selling in the stock index futures market.

What Happened: The China Securities Regulatory Commission (CSRC) has contacted several hedge fund managers, urging them to curb short selling in the stock index futures market, Reuters reported on Wednesday, citing two sources. The move is part of the government’s efforts to stabilize the stock market, which has seen a significant downturn.

One hedge fund manager disclosed that the China Financial Futures Exchange (CFFEX) had cautioned against reckless short selling, particularly “naked” short selling that is not conducted for hedging purposes. Another source stated that the exchange had informally advised their firm to refrain from short-selling for speculative purposes.

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Despite the lack of specific restrictions in the informal guidance, regulators hinted at curbing shorting activities using stock index futures. Some investors were nudged to unwind their heavy short positions as soon as possible.

Why It Matters: The Chinese stock market has been experiencing a downward trend, with the blue-chip CSI300 Index reaching near five-year lows. This has led to the government making fresh commitments to stabilize the capital markets. The market’s decline has been attributed to various factors, including a deepening property crisis, shaky economic recovery, and relentless foreign selling.

Amid the market slump, the Chinese government is reportedly considering a $278 billion rescue package to stabilize the situation. This comes after Chinese Premier Li Qiang highlighted China’s stability and potential for high returns on investment to foreign investors at the World Economic Forum in Davos.

However, the question of whether Chinese stocks and the broader emerging markets represent an attractive investment opportunity or a value trap remains. This debate has been ongoing, with analysts initially predicting a robust rally in China’s stock market following the termination of the country’s stringent COVID-19 measures.

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