Chinese Regulators Clamp Down on Trading Amid Stock Market Decline

A Cap on Some Securities Firms’ Cross-Border TRS Transactions
A Complete Ban on Sell Orders for Some Quantitative Hedge Funds
Investor Complaints on the Rise: Close Attention to Market Stabilization Funds Announced

Bloomberg reported on the 5th (local time) that Chinese financial regulators are tightening trading restrictions on domestic and foreign institutional investors to avert a stock market decline, citing sources familiar with the matter.

Starting this week, regulators have set a cap on the total return swaps (TRS) cross-border transactions for some securities firms, limiting the channels via which Chinese-based investors can sell Hong Kong stocks. At the same time, domestic institutional investors were instructed not to reduce their positions when buying mainland stocks for foreign businesses through TRS.

Some quantitative hedge firms were strictly forbidden from selling orders from the previous day. Other quantitative hedge funds were instructed not to reduce their stock positions in leveraged market-neutral funds. Such bets, known as direct market access strategies, are believed to have recently amplified the selling trend of small-cap stocks.

China is intensifying efforts to stabilize the stock market as stock prices plunged to a five-year low on the 2nd as investor complaints are rising. In particular, it is believed to be taking measures to recover trust in the world’s second-largest economy after $7 trillion evaporated from the stock market over three years.

The China Securities Regulatory Commission announced on the 4th that it had discovered several cases of stock market manipulation and malicious short selling. It pledged to respond promptly to prevent illegal activities that hinder the stable operation of the stock market and harm investors.

Authorities have not yet announced a specific plan for market stabilization funds. Amid recent reports that a 2 trillion yuan market stabilization policy is under review, the investment industry indicates that the scale is inadequate to quell massive stock sell-offs.

Liu Weihui, a researcher at the Chinese Academy of Social Sciences, suggested that a market stabilization fund of over 10 trillion yuan must be established as soon as possible.