China Clamps Down On Margin Trading And Short-Selling To Stabilize Market

China Securities Regulatory Commission -- the country’s stock market regulator -- called on China’s securities brokers and fund management firms to step up supervision of margin trading.

In a statement released Friday, Zhang Yujun, assistant chairman of the CSRC, also urged brokers to prohibit “malicious short selling” that uses algorithms for fast trading, according to media reports.

Margin trading refers to a form of leveraged investment practice that utilizes borrowed money to purchase stocks. This is believed to be a big reason for the drastic rise in China’s Shanghai Composite index between June 2014 and June 2015.

Zhang also prohibited providing cash or any other assistance to the so-called “umbrella trusts,” which have been used to fund margin trading, during a meeting with fund managers and brokerages on Friday, according to media reports.

On Friday, the Shanghai Composite Index jumped 2.3 percent -- closing at 3,744.20 -- on top of Thursday’s 0.9 percent rise. The rise comes on the heels of stringent market-stabilizing measures announced by the Chinese government and the country’s stock market regulator.

Earlier this week, the Shanghai and Shenzhen stock exchanges announced that they would discontinue same-day transaction settlements -- in which trades are completed the day they are made -- for short-sellers. They reportedly blamed the practice, which derives profits from a market downturn, for causing “abnormal fluctuations in share prices and impacting the stable operation of the market.”