Hong Kong Exchanges & Clearing Ltd., Asia’s biggest bourse operator, said it will tighten short-selling regulations by tripling the minimum market value stocks must have before allowing such trades.
Stocks eligible for short selling must have a market capitalization of HK$3 billion ($386 million) from July 3, up from HK$1 billion now, the operator of the city’s exchange said in a statement yesterday. Had the new rules been adopted at the bourse’s last quarterly review, 82 of 646 securities would have become ineligible, it said.
Short-sellers sell borrowed shares with plans to buy them back later at a lower price, a practice politicians and some investors blame for roiling markets. The trade is known as “naked” when sellers haven’t first taken steps to ensure that they can borrow the securities. The tighter restrictions in Hong Kong follow short-selling legislation in the U.S. and Europe.
The tighter criteria would “help to prevent market sentiment from getting nervous on rumors and news,” said Ben Kwong, chief operating officer at KGI Asia Ltd., a Hong Kong-based brokerage.
If a stock becomes ineligble under the new rules, market participants may no longer sell it short, but existing positions will not be affected, said Scott Sapp, a spokesman for Hong Kong Exchanges. The 82 previously-mentioned stocks accounted for 0.2 percent of short selling turnover from March 12 to April 11, he said.
Allegations by short sellers have led to a steep drop in stock prices for some Chinese companies. Shares of Winsway Coking Coal Holdings Ltd., which processes and transports coal to China from Mongolia, have tumbled 36 percent this year after Jonestown Research, an anonymous short seller, published a report in January alleging Winsway made “material misstatements” regarding its inventories and the amount of coal it imported.
Huabao International Holdings Ltd., a cigarette flavor maker, plunged 8.1 percent on April 24 after a report by Anonymous Analytics said the company “reports absurdly high margins, which industry sources say should not be possible.”
Winsway denied the allegations, while Huabao said they were misleading.
Under Hong Kong’s new rules, Midland Holdings Ltd., Goodbaby International Holdings Ltd. and Evergreen International Holdings Ltd. would be among the stocks no longer eligible if the ban were enacted today, according to data compiled by Bloomberg.
Countries across Asia and Europe enacted short-selling bans following the collapse of Lehman Brothers Holdings Inc. in 2008 to stem market volatility, though most have been lifted. France, Belgium and Spain ended bans in February. South Korea has banned the short-selling of financial stocks since October 2008, and temporarily banned non-financial stocks
The required turnover velocity for securities to be short sold in Hong Kong has been increased to 50 percent from 40 percent, the exchange said. The exchange said the Securities and Futures Commission has approved regulation supporting the change.
“The change reflects the fact that the average market capitalization of listed companies in Hong Kong has grown by around three times and the market turnover velocity has increased from around 40 percent to over 50 percent in the past decade,” the exchange said in the statement.
The exchange said in October it was considering creating a central stock borrowing and lending facility. The SFC created more stringent reporting requirements for short positions the same month. The rules haven’t gone as far as some local brokers would like, with the Hong Kong Securities Professionals Association calling for a ban on all short-selling in October, saying it would protect the interest of retail investors.
Hong Kong regulators have been tightening rules across the industry, including a recent plan to jail bankers for signing off on false information in prospectuses.