China Targets Short Sellers in Stock-Index Futures Contracts

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China will limit the opening of new futures contracts in an index of small-company stocks to rein in excessive trading and stem a bear market rout.

Investors can buy or sell at most 1,200 new contracts linked to the CSI 500 Index per day starting Tuesday, the China Financial Futures Exchange said in a statement on its official microblog on Monday night. The CSI 500 futures contract for July delivery plunged 8.6 percent at the close. The underlying index slumped 6.5 percent, extending losses to 41 percent since the June peak.

The measure, which comes after the exchange made it more expensive to speculate on stock-index contracts, is intended to curb short selling and won’t work, according to Xinhu Futures Co. China’s state-run media has blamed rumor-spreading short sellers and foreign investors for a stock-market rout that erased more than $3.2 trillion of value in less than a month.

“The move is intended to limit the power of short-selling on the futures market and this is what the exchange can do now under the pre-condition that it doesn’t break the rules of the game,” said Jiang Lin, an analyst at Xinhu Futures in Shanghai. “However, the effect may be limited as overall valuations of small caps are still pretty high. Once the downtrend takes hold, it cannot be easily reversed.”

Short selling allows traders to wager on rising and falling markets and can be used as a tool to hedge their holdings. In China, it’s allowed on futures contracts linked to the CSI 300, SSE 50 and CSI 500 indexes.

The financial futures exchange will strengthen the management of futures for hedging purposes and report any alleged law violations to the China Securities Regulatory Commission for investigation, according to Monday’s statement.

— With assistance by Shidong Zhang

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