China Now Urges Banks To Stop Illegal Flow Into Stocks

China now urges banks to stop illegal flow into stocks deriving from loans, part of its new measures to protect investors.

Chinese regulators have called on financial institutions to enhance their internal controls regarding leverage and to ensure that bank loans do not unlawfully flow into the stock market, as reported by a newspaper linked to China’s central bank on Tuesday.

These verbal instructions, known as window guidance, are intended to safeguard investors, according to the Financial News, which is associated with the People’s Bank of China.

Chinese regulators have cracked down on stock market manipulation, gaining admiration from many retail investors in the United States.

According to the data from China Securities Finance and Bloomberg, the outstanding value of shorted stocks on the mainland’s exchange declined to 23.2 billion yuan (around $3.2 billion) at the end of July, reaching a level not seen since May 7, 2020.

The value dropped 0.6% on July 31, marking the 15th consecutive day of declines, the longest such streak on record.

This unraveling came after the China Securities Regulatory Commission (CSRC) introduced a series of decisions in July aimed at curbing the practice of borrowing stocks for short-selling.

The CSRC suspended the securities-lending business of the state-backed margin finance company China Securities Finance and raised the minimum collateral that short-sellers need to pledge.

Short-selling has been in the regulator’s crosshairs over the past year, as it has been partly blamed for the prolonged downturn in China’s $8.5 trillion stock market.

The data shows a significant decline in the value of shorted stocks on China’s exchange, which coincides with the CSRC’s recent measures to limit short-selling activities, as the regulator aims to address the impact of short-selling on the country’s stock market performance.

However, China is not the only country that has targeted short selling to revive investors’ confidence.

In June, South Korea extended a ban on short-selling through the first quarter of 2025 “to prepare … systems intended to prevent naked short selling and to alleviate concerns about potential disruption in the market’s fair pricing function”.

In the same month, Thailand raised the market-capitalization threshold for the stocks that can be borrowed, making fewer stocks available to short sellers.

Recently, China’s securities regulator has promoted the head of their law enforcement division to the role of vice chairman to strengthen the oversight and regulation of China’s massive $5.1 trillion stock market.

Meanwhile, predatory short selling continues to be a large issue in the United States.

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Also Read: TD Bank Now Gets Caught With Illegal Market Manipulation

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