Beijing tells some investors not to sell as Chinese stock rout resumes

Chinese authorities have in recent days told some institutional investors not to sell stocks, as regulators face renewed pressure to stabilise share prices following the steep decline in the first weeks of the new year.

Since October, market regulators have been providing private instructions — known as “window guidance” — to some investors, which prevent them from being net sellers of equities on certain days.

Such restrictions on selling helped to spur a rebound of about 3 per cent for the benchmark CSI 300 stock index in the final week of 2023, traders said. But as the curbs on some smaller mutual funds and on brokers were eased in the new year, the index completely reversed those gains and is down more than 4 per cent this month.

Beijing has now reimposed such restrictions on securities companies — large institutional investors in China that both act as brokers and have proprietary trading arms — according to traders and investment managers at three different financial institutions.

The investors and traders also said the change of direction by regulators, the latest in a series of U-turns, was distorting the market and undermining broader confidence.

“This type of window guidance creates delayed selling pressure, but it’s not like you can postpone that forever,” said a director at one Shanghai-based securities company whose proprietary trading desk was recently told to avoid net selling again. “Market sentiment will eventually dictate performance.”

Financial regulators are under pressure from top leaders to end a protracted sell-off that has left the CSI 300 down 19 per cent in the past year. Public measures to reinvigorate demand, such as trading fee cuts and purchases of bank shares by a central government investment fund, have failed to restore investor confidence.

Instead the China Securities Regulatory Commission and stock exchanges in Shanghai and Shenzhen have turned to issuing private window guidance. The CSRC, Shanghai Stock Exchange and Shenzhen Stock Exchange did not respond to requests for comment.

Authorities were forced at the start of January to permit net sales at smaller mutual funds, which faced mounting redemptions from customers worried about further price falls, said traders and fund managers.

Those divestments spooked Chinese retail investors, said the traders and investment managers, triggering renewed selling. This saddled some of the country’s largest mutual funds, which still face strict limits on net selling, with heavy losses.

The recent interventions have differed from the playbook typically deployed by Beijing, traders said. The government has yet to deploy state-run funds and financial institutions, the so-called “national team”, to buy up stocks on a large scale as they have done during previous routs.

For mutual fund companies, the severity of restrictions on net sales is based on a given fund’s assets under management, with larger funds facing more stringent policing.

“There’s not a good track record of this type of intervention in equities actually working,” said Mohammed Apabhai, head of Asia trading strategy at Citigroup. “Yes it can potentially relieve some of the selling pressure, but the Chinese market is very much driven by what’s going on with the fundamentals and attitudes towards private business more than anything else.”

Allowing some smaller funds to sell more shares has enabled them to meet demand for redemptions, but fund managers said these exceptions were only granted on a case-by-case basis by officials, who did not provide any rationale for rejecting one request or accepting another.

Xia Chun, chief economist at Forthright Financial Holdings in Hong Kong, said the net sales restrictions were unlikely to lift investor sentiment in China.

“Retail investors won’t welcome such window guidance in any case, because it’s simply not working,” he said.