China reverses course: lifts stock net-selling ban on mutual funds, raising concerns

Sources with direct knowledge revealed that the China Securities Regulatory Commission (CSRC) has lifted the late-2023 ban on mutual funds selling more shares than they buy each day.

Chinese regulators have removed a key market support measure, potentially signalling a shift in their approach to bolstering the struggling stock market. This comes amidst ongoing economic challenges and heightened geopolitical tensions, casting a shadow over the country’s financial stability.

Sources with direct knowledge revealed that the China Securities Regulatory Commission (CSRC) has lifted the late 2023 ban on mutual funds selling more shares than they buy each day. This measure, implemented at the behest of the top leadership to prop up the flagging CSI300 index, had restricted major fund companies from net selling in an attempt to curb market sell-offs.

The reasoning behind the policy reversal remains unclear, but one source familiar with the matter hinted at rising redemption pressures on funds as a potential factor. The sustained underperformance of the Chinese market in 2023, despite numerous support measures, may have eroded investor confidence and triggered increased fund withdrawals.

Sources also reported the disappearance of unofficial, verbal guidance (“window guidance”) from regulators in recent days. This practice, while opaque, had previously offered clues about the CSRC’s intentions and influenced market behaviour.

The CSI300, despite the various interventions, remained one of the worst-performing global markets in 2023. Even the slew of government initiatives, including cuts in trading fees, restrictions on share sales, and slowed new listings, failed to significantly revive investor sentiment. The latest market data paints a worrying picture, with the blue-chip index plunging to its lowest level in nearly five years on Monday. Traders attribute this decline to a lack of confidence in the domestic economy and escalating tensions with the U.S. and its allies.

The lifting of the net-selling ban raises concerns about potential further market dips due to increased selling pressure from mutual funds. The opaque communication from the CSRC and the uncertain economic and geopolitical situation adds to the volatility and risk aversion. While some view this reversal as a move towards a more market-driven approach, others worry it could exacerbate the downward spiral.