(Yicai) July 12 -- Suspending securities relending will not significantly impact institutional investors, professionals said after the Chinese securities regulator approved the application of China Securities Finance, the only financial service company in the country allowed to carry out securities relending, to halt its securities relending business.

There are two main reasons suspending securities relending will not affect institutional investors. First, financial institutions can directly borrow securities for lending. Second, the securities lending market has already significantly shrunk since the beginning of the year because of tighter regulations, so the size of related operations is very small. 

On July 10, the China Securities Regulatory Commission announced it approved stock exchanges' applications to raise investors' collateral ratio for securities lending to 100 percent from 80 percent and that of private equity to 120 percent from 100 percent from July 22. Moreover, the CSRC noted that it had approved CSF's request to suspend its relending business, effective yesterday.

Securities lending occurs when financial institutions loan shares to other entities for a certain period for a fee for the borrower to sell them on the open market and expect to repurchase them cheaper to maker a profit before returning them to the lender. Securities relending is when financial institutions lend their own securities to brokerages for them to engage in securities lending.

The Chinese mainland stock market’s securities lending balance is around CNY31.8 billion (USD4.4 billion), down from CNY71.6 billion at the beginning of the year, according to Hua Chuang Securities. The relending securities balance plunged to CNY29.6 billion, as the CSRC has halted new relending securities in February.

As of June 30, the daily volume of stocks sold through securities lending accounted for only 0.2 percent of the Chinese mainland market's total, down from 0.7 percent at the beginning of the year.

Public funds' securities lending also significantly narrowed this year, a strategist at a quantitative PE with at least CNY10 billion in assets under management told Yicai.

In addition to securities relending, PE institutions can also obtain securities through securities lending by signing contracts with major shareholders of listed companies or other institutions.

However, the problem of securities lending is the slowness of the process, the manager of a quantitative PE with at least CNY10 billion in assets under management told Yicai.

"If we want to borrow shares from 100 listed companies, we need to negotiate with each of them and sign 100 different contracts," the manager noted. “In comparison, signing a single deal with CSF enables us to borrow securities from hundreds of firms at once.”

The full suspension of securities relending will mainly impact financial institutions' long-short equity, an investment strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline.

"Long-short equity has been quite popular in the past years because of the volatility of the market," the quantitative PE manager said. “Compared to regular one-direction strategy, long-short equity allows investors to make profits both when stocks fall or rise.”

Several staffers at PE managing at least CNY10 billion of assets told Yicai that the new rules implemented since the beginning of the year to limit securities lending and relending had only a limited impact on their strategies.

In fact, the size of flexible hedging and long-short equity positions is only about CNY50 billion, according to a prediction from Hua Chuang Securities' non-banking finance team. “Overall, the regulations will not notably hit the market.”

Editors: Xu Wei, Futura Costaglione