IG: Chinese regulators have now banned intraday short selling


Bernard Aw, Market Analyst, at Singapore IG wrote today that Chinese regulators have now banned intraday short selling, requiring traders to wait one day before returning the borrowed shares. The rationale behind the latest move from the authorities was that intraday short selling has increased ‘abnormal’ price movements in stocks, which heightened market volatility. The restriction would therefore push out day traders and helped stabilize the stock market.

In the broader scheme of things, the Chinese authorities are going after ‘malicious’ short-sellers whom they blamed for compromising the slew of support measures rolled out to stabilize the market. The two main exchanges have frozen 38 accounts, as the authorities investigate whether algorithmic trading has disrupted the market. While the Shenzhen Exchange said that the new T+1 rule for short selling should not affect normal margin trading and securities financing, I feel that it will further squeeze the profit margins of brokers. According to Bloomberg, revenue from margin financing and short selling accounted for 18% of total sales last year. The proportion should be considerably larger now, given the huge rally in the first half of this year.

Chinese equities received state funds’ support yesterday, and recoup some of the earlier losses. The China A50 closed up over 1%, trailed behind by CSI 300 at 0.3%. The short-selling restriction might bolster the defense on the downside.

 

Shanghai Composite Index (INDEX) one year chart.
Shanghai Composite Index (INDEX) one year chart.

 

Commodities slip

Meanwhile, weakening growth in the global economy piled on the pressure for commodities. We saw a surprise downward adjustment to China’s gauge for smaller manufacturers’ activity, signalling further weakness in the Chinese economy. Adding to the soft manufacturing picture is the disappointing US ISM manufacturing data and construction spending, which undershot consensus. The Continuous Commodity Index (CCI) breached below 400, touching fresh six-year lows.

Juxtaposing the waning demand in crude oil with persistent upticks in supply, the overhang seems to be widening. As if the news for crude is not bad enough, Iranian news agency reported that the country can raise output by 500,000 barrels a day within a week of the sanctions lifting. Brent slipped below $50 for the first time since January. WTI headed towards $45.

Precious metal were not spared. Yesterday, gold fell 0.82% to return to sub-$1090. Other metals also did not fare well, with copper, nickel and zinc trending lower. Iron ore however rebounded yesterday, recouping most of the losses posted last Thursday and Friday.

In Asia, the Reserve Bank of Australia announced its rate decision in the afternoon and we saw an unchanged verdict of the cash rate stuck at 2.00%. Likewise, policy rate adjustments at the Reserve Bank of India meeting today were null leaving interest rates unchanged.

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IG: Chinese regulators have now banned intraday short selling

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