Caixin
Dec 29, 2020 08:17 PM
FINANCE

Foreign Investors Seal Deals Through New Channel for Short Selling Chinese Stocks

On Monday, the value of outstanding securities borrowing on the Chinese mainland stood at 129 billion yuan.
On Monday, the value of outstanding securities borrowing on the Chinese mainland stood at 129 billion yuan.

China on Tuesday saw its first margin financing and securities borrowing deals by qualified overseas investors, marking a significant step forward in the country’s financial opening-up.

Using the recently revamped Qualified Foreign Institutional Investor (QFII) program and its yuan-denominated sibling, the Renminbi Qualified Foreign Institutional Investor (RQFII) program, investors who sealed margin financing and securities borrowing deals on Tuesday included Swiss banking giant UBS AG.

On Nov. 1, China eased restrictions within the QFII and RQFII programs to widen overseas institutional investors’ access to the country’s capital market, giving them more investment options, including margin financing and securities lending and borrowing.

Previously, overseas investors conducted such margin financing and securities borrowing through the Shanghai- and Shenzhen-Hong Kong stock connect programs.

An industry source said that QFII and RQFII investors may go more for securities borrowing than margin financing based on their trading habits and preference for longer-term investments.

China rolled out rules nationwide in 2011 for margin financing and securities borrowing, but tight restrictions have made securities borrowing — a tool for short selling — much less used. When investors use margin financing to borrow money to buy a stock, it means they believe the stock’s price will rise; and when they borrow shares of a stock to sell them via securities borrowing, it means the opposite.

On Monday, the value of outstanding securities borrowing on the Chinese mainland stood at 129 billion yuan ($19.8 billion), accounting for just about 8% of all outstanding margin financing and securities borrowing, which totaled 1.62 trillion yuan, exchange data show.

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On Tuesday, UBS executed several securities borrowing and subsequent short-sales transactions through its QFII account. “Demand from global investors for China A-share investments continues to grow at a very fast pace,” Tim Wannenmacher, head of Asia-Pacific financing and co-head of distribution at UBS, said in a Tuesday statement.

“Allowing institutional investors to access the onshore securities lending and borrowing market, thus facilitating low net-investment strategies, is a major development and will support the growth and diversification of investment strategies,” Wannenmacher said.

Tommie Fang, head of China global markets and QFII representative at UBS, said that the latest relaxation of QFII rules is important because “foreign participation in China’s onshore securities lending and borrowing market enhances the ‘price-discovery’ function of the stock markets.”

“The latest regulatory relaxations offer more investment instruments to QFII, among which the stock borrowing and lending businesses have always been the most attractive ones that are frequently inquired by many overseas institutional investors,” Rick Hu, head of Standard Chartered Bank (China) Ltd.’s securities services, said in a statement. The bank facilitated a QFII securities borrowing deal as a custodian on Tuesday.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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