Amid market turmoil, China halts limited stock lending.

China's securities regulator has announced another move to curb short-selling activities amid stock market turmoil.

The China Securities Regulatory Commission announced on its WeChat account that it will stop lending restricted shares from January 29.

Restricted shares are subject to certain sale and transfer restrictions. These restrictions are often part of corporate governance policies or employee compensation plans, thus limiting their sales. However, it can be loaned to traders who engage in derivative contracts, including short sales.

According to the CSRC's statement, the new rules are intended to “emphasize fairness and rationality, reduce the efficiency of collateralized lending, and limit institutions' information and tool use advantages, giving all types of investors more time to assimilate market information.” and creating a fair market system.

China has been weighing restrictions on capital flows. In an earlier move, the nation's largest brokerage stopped offering stocks to retail investors and raised margin requirements for institutional investors on Jan. 22 under window guidance from regulators, Bloomberg reported.

Another initiative took place in October when the Environmental Commission announced new rules for hedge funds, restricting stock lending by strategic investors and including regulation of arbitrage activities.

Short selling is a financial strategy in which an investor borrows shares of stock and sells them to the market in the hope that the stock's price will fall. This strategy is used by investors who believe that a stock is overvalued or undervalued.

China's stock market has faced significant challenges in the past year. The CSI 300 index is down 11% in 2023, while the MSCI China index is down 10% this year after falling 23.6% in 2022 and 22.8% in 2021.

In addition, foreign investors' confidence in the Chinese market has dropped significantly, according to the South China Morning Post. Non-Chinese investors sold more than 170 billion yuan ($23.4 billion) worth of offshore shares between July and November last year.

Despite market challenges, China is investing heavily in pilot projects for its central bank digital currency (CBCC) – the digital yuan. Among the emerging use cases for the technology are integration with multiple foreign banks, as well as the use of digital yuan to settle commodity transactions on Shanghai exchanges.

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