China promotes short-selling by letting insurers lend securities

The central business district of Shanghai, China. China cracked down on short-selling activities during the stock market crash in 2015, and blamed foreign short-sellers. (Photo by Bloomberg)

The central business district of Shanghai, China. China cracked down on short-selling activities during the stock market crash in 2015, and blamed foreign short-sellers. (Photo by Bloomberg)

-A +A

SHANGHAI (Dec 3): China on Friday (Dec 3) authorised its insurers to take part in securities lending, potentially boosting short-selling activities in the country's stock and bond markets.

Chinese banks, brokerages and mutual fund houses can already conduct the business, lending securities holdings to other market players, such as short-sellers, for interest income.

The China Banking and Insurance Regulatory Commission (CBIRC) published the rules on Friday allowing insurers to participate in securities lending.

The move could help insurers improve returns on their long-term and sizeable stock and bond holdings, the CBIRC said in a statement.

In addition, the measures "can help improve market liquidity and vibrancy", the CBIRC added.

According to official data, Chinese insurers held 11.6 trillion yuan (about RM7.7 trillion) of bonds, stocks and securities funds at the end of October.

Yuan Yuwei, a hedge fund manager at Water Wisdom Asset Management, welcomed the move, saying: "improving China's short-selling mechanism can decrease market volatility, and push market prices of securities closer to their intrinsic value."

It will also reduce the chance of market bubbles, while creating additional income for insurers, he added.

China cracked down on short-selling activities during the stock market crash in 2015, and blamed foreign short-sellers.

Although China has gradually relaxed short-selling rules over the past years, the size of the securities lending business remains small.

The outstanding value of securities lending stood at 149.8 billion yuan (US$23.51 billion or about RM99.48 billion) at the end of October, less than 9% of the outstanding value of margin loans, according to official data.

The CBIRC said on Friday that the global securities lending business totalled €2.3 trillion (US$2.6 trillion or about RM11 trillion) at the end of 2020, and the business is a normal practice to improve secondary market liquidity.

In the rules published on Friday, the CBIRC set the eligibility threshold for the business and urged insurers to strengthen risk controls when participating in securities lending.