China tightens stock market control, bans net selling by institutions

China has implemented a new measure to control its stock market, banning major institutional investors from reducing equity holdings at the opening and closing of each trading day. This move comes as part of the government's efforts to stabilize the nation's $8.6 trillion stock market.

The China Securities Regulatory Commission (CSRC), under the leadership of Chairman Wu Qing, has instructed major asset managers and proprietary trading desks of brokerages to adhere to this new regulation. Additionally, a task force has been formed with the nation's stock exchanges to monitor short selling activities and issue warnings to firms profiting from such transactions.

This ban on net selling during the opening and closing periods of trading represents a significant tightening of the government's control over market activity. It poses challenges to popular strategies used by hedge funds and other institutional investors, as affected firms are now unable to sell more shares than they buy during these crucial periods.

While the extent of the ban's application across the financial industry remains unclear, it is not expected to impact individual investors significantly. However, sidelining major institutions during key trading times could potentially make it easier for government-backed funds to influence market movements, particularly concerning benchmark indexes' closing levels.

Chairman Wu, known for his strict regulatory approach during his tenure in the mid-2000s, is taking decisive measures to prevent the prolonged slump in the stock market. This decline has been a visible concern, reflecting diminishing confidence in President Xi Jinping's ability to address economic challenges such as deflation and a persistent property crisis.

Despite recent market volatility, the CSI 300 Index saw a 1.4% rise on Wednesday, continuing its rebound from the year's lows. Nevertheless, it remains down approximately 17% over the past year.

In addition to the ban on net selling, China has intensified its crackdown on quantitative trading following a significant sell-off by a major hedge fund earlier in the week. This move disrupted normal trading order, prompting exchanges to freeze accounts and pledge tighter supervision of such trading activities.

The CSRC has engaged in dialogue with investors, signaling a willingness to address concerns promptly. Furthermore, it is considering additional measures to tighten IPO approvals, promote dividend payouts, and combat financial fraud while encouraging more long-term investment in the stock market.

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