China on Friday authorized its insurers to take part in securities lending, potentially boosting short-selling activities in the country’s stock and bond markets.
Chinese banks, brokerages and mutual fund houses can already conduct the business, lending securities holdings to other market players, such as short-sellers, for interest income.
The China Banking and Insurance Regulatory Commission (CBIRC) published rules on Friday allowing insurers to participate in securities lending.
The move could help insurers improve returns on their long-term, and sizable stock and bond holdings, CBIRC said in a statement.
In addition, the measures “can help improve market liquidity and vibrancy,” CBIRC added.
According to official data, Chinese insurers held 11.6 trillion yuan of bonds, stocks and securities funds at the end of October.
Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management welcomed the move saying: “improving China’s short-selling mechanism can decrease market volatility, and push market prices of securities closer to their intrinsic value.”
It will also reduce the chance of market bubbles, while creating additional income for insurers, he added.
China cracked down on short-selling activities during the stock market crash in 2015, and blamed foreign short-sellers.
Although China has gradually relaxed short-selling rules over the past years, the size of the securities lending business remains small.
The outstanding value of securities lending stood at 149.8 billion yuan ($23.51 billion) at the end of October, less than 9% of the outstanding value for margin loans, according to official data.
CBIRC said on Friday that global securities lending business totalled 2.3 trillion euros ($2.60 trillion) at the end of 2020, and the business is a normal practice to improve secondary market liquidity.
In the rules published on Friday, CBIRC set the eligibility threshold for the business, and urged insurers to strengthen risk controls when participating in securities lending.
($1 = 6.3718 Chinese yuan renminbi) ($1 = 0.8861 euros)