China, Hong Kong Regulators May Review Short Selling

By Chen Shiyin and Chia-Peck Wong

Oct. 29 (Bloomberg) -- China and Hong Kong regulators may review short selling of stocks in the two markets to stem a slump in equities, newspapers said.

China plans to delay the start of margin lending and short selling on concern their introduction will aggravate market volatility, the South China Morning Post reported, citing people it didn't identify. Hong Kong's Securities and Futures Commission yesterday visited local brokerages and asked for documentation on short-selling activities, raising speculation the regulator is considering banning the practice, the Standard said.

China's CSI 300 Index has dropped 68 percent this year, the most among all Asian stock indexes, on concern a global recession will reduce demand for the nation's goods. Hong Kong's Hang Seng Index has lost 53 percent, compared with a 49 percent decline in the MSCI Asia-Pacific Index.

``There's a fear that the lack of genuine interest in risky assets and longer-term investors will allow short sellers to dominate the market,'' said Michael Foo, Singapore-based head of Asian portfolio management at Clariden Leu AG, which manages the equivalent of $126 billion in assets globally. ``This may bring back confidence in the system in the short-term, but in the longer term, regulators seem to be trying to cure a symptom rather than a cause.''

Hong Kong's Securities and Futures Commission doesn't comment on market speculation, spokesman Jonathan Li said today. Calls to the China Securities Regulatory Commission weren't answered, while the regulator's former chairman Zhou Zhengqing said the practice should be restricted.

Asia, U.S. Restrictions

Other markets have already introduced bans on short-selling. A temporary ban on so-called naked short sales in Japan took effect yesterday, Finance Minister Shoichi Nakagawa said. The government had earlier planned to introduce the restriction on Nov. 4.

The U.K.'s Financial Services Authority was the first securities regulator in the world to issue a ban on short selling last month, while regulators in Australia, South Korea, Taiwan and Indonesia have also introduced temporary bans this year.

In the U.S., the Securities and Exchange Commission on Sept. 19 introduced a temporary ban on the short selling of almost 1,000 finance-related stocks to curb speculation after the chief executive officers of now-bankrupt Lehman Brothers Holdings Inc. and Morgan Stanley accused hedge funds of driving down prices. The restriction has since expired.

`Price Stability'

Short sellers try to profit by betting prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference. In naked short sales, traders issue sell orders and don't borrow the shares.

The China Securities Regulatory Commission said on Oct. 5 the country will start margin lending and short selling among securities companies to create ``an internal price stability'' within the local markets.

China's State Council, or cabinet, has put on hold the measures, scheduled to start next month, the Hong Kong-based South China Morning Post reported today.

Zhou, the former CSRC chairman, said today at a forum in Beijing that a lack of intervention in the nation's stock market could cause ``a panic sale'' among investors and the government should set up a stock market intervention fund.

The People's Bank of China has cut borrowing costs twice this year and said on Oct. 22 it will lower down payment requirements and cut interest rates on mortgages for first-time home buyers. The government on Oct. 19 also unveiled measures to stimulate the economy in the face of the global slowdown, including infrastructure spending and higher export-tax rebates.

Insurer Impact

The Financial Times said today China's insurance commission asked the heads of the nation's largest government-controlled insurers to help stabilize the market. Insurers have cut net sales of stocks since the meeting, the report said.

China's insurance regulator said in a statement today the nation's insurers should stick to ``long-term'' investment strategies and support the stable development of the nation's capital market.

A measure of the CSI 300's historical price volatility touched a record high of 79 earlier this month, according to data tracked by Bloomberg.

In Hong Kong, the Hang Seng Index's volatility measure climbed to 126 yesterday, the highest since 1997, according to data tracked by Bloomberg. The benchmark gauge yesterday posted its steepest gain in 11 years, jumping 14 percent and reversing a 13 percent drop the previous day.

Possible Ban?

Hong Kong government officials are divided over whether to impose a possible ban on short selling, the Standard reported, citing a government official it didn't identify. Some investors are concerned the practice may be outlawed with little advance notice, the newspaper said.

Securities and Futures Commission spokesman Li said the regulator ``closely monitors'' markets. ``If we come across any abusive short selling actions, we'll take the appropriate measures.''

The regulator said on Oct. 23 that short selling in Hong Kong is at levels ``consistent'' with those before the current financial turmoil.

Financial Secretary John Tsang said this week that the stock market will ``continue to be volatile for a period of time,'' adding that the government will act to support equities if needed.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net; Chia-Peck Wong in Hong Kong at cpwong@bloomberg.net