Further limits on securities refinancing urged

As investor confidence in China's A-share market has yet to substantially improve, finance experts stressed the need to further limit securities refinancing activity or potentially even halt it to ensure market fairness and stability.

In essence, the securities refinancing market enables listed companies' major shareholders to lend shares they own to investors for short-selling. Such shareholders lend their stocks to a securities finance company, and the company lends the shares to a brokerage, which, in turn, lends them to investors for short-selling purposes.

China has prohibited the lending of restricted shares — stocks that cannot be sold during a lock-in period — in a new regulation on Friday, aimed at fending off large shareholders' illegal shareholding reduction moves. Yet, major shareholders' lending of circulating shares remains permissible.

With the benchmark Shanghai Composite Index hovering between 3085.38 and 3174.27 points this month despite improving economic data and continuous policy support, some retail investors have attributed the lukewarm performance to securities refinancing activity.

Common complaints on social media include that securities refinancing could facilitate short selling, intensify downward market pressure and put retail investors in a disadvantaged position as only those with securities assets worth at least 500,000 yuan ($69,099) are eligible to borrow shares.

"Blaming the market downturn and volatility solely on securities refinancing is clearly unreasonable," said Yang Haiping, a researcher at the Central University of Finance and Economics' Institute of Securities and Futures.

However, securities refinancing indeed causes inequities among different types of investors, easily stirs up trouble during market downturns and can hinder the restoration of investor confidence, Yang said.

"In light of this, while adopting various measures to enhance the quality of listed companies, combat illegal activities and encourage the entry of long-term capital, it is advisable to first completely halt securities lending," he said.

Independent stock market analyst Wang Jiyue suggested that instead of using asset size as the threshold to determine eligibility for borrowing shares, eligibility should be based on passing qualification tests to address issues of fairness.

Data from Wind Info showed that the outstanding amount of shares lent in the stock refinancing market has decreased to 45.88 billion yuan as of the end of April, from 110.42 billion yuan as of the end of last year as the China Securities Regulatory Commission has made efforts to better regulate the activity.

Wu Qing, chairman of the CSRC, said in March that the commission will further strengthen regulations when it comes to securities refinancing to address loopholes.

Xue Yi, a professor of finance at the University of International Business and Economics, said that completely shutting down the stock refinancing market may not be the best option as it is still beneficial in terms of boosting liquidity and providing risk hedging.

But Xue stressed the need to optimize the regulations related to securities refinancing, including requiring institutional investors to disclose the real-time data of their share borrowing behaviors — including whether the borrowed equities are used for short-selling — and introducing third-party audit firms to assure disclosure compliance.

It is also necessary to impose stricter restrictions on the volume of short-selling by investors who have borrowed shares during market downturns and in sectors strategically important for national security, to guard against malicious short-selling, Xue said.

The monitoring of securities refinancing should be strengthened to better detect and restrict frequent arbitrage activities, he added.

Yang Delong, chief economist at First Seafront Fund, said it is reasonable to restrict the size of securities refinancing during drastic market slumps, but completely abolishing the practice could impede price discovery and lead to market bubbles over the long run.