China Stocks Rise as Brokerages Ban Short Selling to Stem Losses

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Who's to Blame for China's Stock Market Swoon?

China stocks rose, with the benchmark index rebounding from a three-week low, as some brokerages halted their short-selling businesses amid increasing state intervention to stem the rout in equities.

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The Shanghai Composite Index gained 3.7 percent to 3,756.55 at the close, snapping a three-day, 4.4 percent drop. China Southern Airlines Co. and China Eastern Airlines Corp. jumped by the 10 percent daily limit as oil prices held near a six-month low. Turnover in the index slumped 36 percent below the 30-day average.

Citic Securities Co., China’s largest brokerage by revenue, is among firms that temporarily stopped short selling by clients after the Shanghai and Shenzhen exchanges introduced a measure requiring investors who borrow shares to wait one day to repay the loans. China has lost its title as the world’s most liquid stock market as trading halts and regulatory efforts to curb bearish transactions drive away investors.

“It looks like all the government’s measures including restrictions on short-selling are working now,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. “It’s a rebound and given the momentum, it may last for some days.” Wu said he’s adding “slightly” to holdings.

Investors who borrow shares must now wait one day to pay back loans, according to statements from the Shanghai and Shenzhen stock exchanges issued after the close of trading on Monday. The short-selling curbs are the government’s latest measures to prop up share prices and prevent market manipulation after an almost $4 trillion selloff.

Short-Selling Curbs

Regulators are also probing “malicious” short-selling and have examined the futures trading accounts of foreign investors. They’ve also banned stock sales by major shareholders, suspended initial public offerings and compelled state-run institutions to support the market with equity purchases.

All 10 industry groups rose on the CSI 300 Index, which advanced 3.1 percent. The measure’s August futures jumped 6 percent to 3,837.80, still trading at a discount of about 90 points to the index. Hong Kong’s Hang Seng China Enterprises Index of mainland companies gained 0.1 percent, while the Hang Seng Index slipped less than 0.1 percent.

Slumping Volume

The Shanghai Composite has tumbled 27 percent since this year’s peak on June 12, while turnover has more than halved, as traders cut leveraged bets and manufacturing data signal the economic slowdown is deepening.

“If volumes cannot increase, the rebound could be over any time,” said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. “The market is still in the process of seeking a bottom, which may take some time.”

Margin traders reduced holdings of shares purchased with borrowed money for a seventh day on Monday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling to a five-month low of 832.5 billion yuan ($134.1 billion).

State-backed margin lender China Securities Finance Corp. has injected 200 billion yuan into five new mutual funds since July in a bid to increase market liquidity, China Securities Journal reported, citing unidentified people familiar with the matter.

Airlines Gain

Air China Ltd. rose 9.4 percent, while Spring Airlines Co. gained 6.8 percent. Oil in London traded below $50 a barrel amid speculation Iranian supplies will exacerbate a global surplus as demand from the U.S. to China slows. Brent futures dropped 5.2 percent on Monday to below $50 for the first time since January.

Kweichow Moutai Co. led an advance among liquor makers, climbing 1.2 percent after China Business News reported that the biggest two producers raised key product prices.

A total of 520 mainland Chinese companies were halted from trading on Tuesday morning, or 18 percent of all listings, up from 517 at the close of the previous day, according to data compiled by Bloomberg.

The median stock on mainland bourses trades at 63 times reported earnings, higher than in any of the world’s 10 largest markets, according to data compiled by Bloomberg. That compares with a multiple of 12 in Hong Kong.