China tightens trading curbs

China is tightening trading restrictions on domestic institutional investors as well as some offshore units as authorities fight to stem a deepening stock rout, according to people familiar with the matter.

Officials this week imposed caps on some brokerages' cross-border total return swaps with clients, limiting a channel that can be used by China-based investors to short Hong Kong stocks, said the people. At the same time, some Chinese brokers that use the channel to buy mainland shares for their offshore units were told not to reduce their positions, the people said.

Some quantitative hedge funds meanwhile were banned from placing sell orders completely starting yesterday, while others were barred from cutting stock positions in their leveraged market-neutral funds. These bets, known as a Direct Market Access strategy, are believed to have amplified the recent sell-off in small-cap stocks.

China is trying to stabilize markets after shares sank to a five-year low on Friday. The latest moves add to the piecemeal steps policymakers have taken as they struggle to end a three-year rout that's erased some US$7 trillion (HK$54.6 trillion) of value.

Hong Kong's Hang Seng Index has dropped 9 percent this year

Shares in China rebounded yesterday afternoon as the securities regulator said it will take steps to prevent risks stemming from share pledges. The CSI 300 Index ended 0.7 percent higher after earlier dipping 2.1 percent and gauges of small cap shares pared losses.

The latest curbs add to steps taken to limit short selling.