China Securities Regulatory Commission (CSRC) in Beijing Photo:VCG

China's stock market regulator has issued new rules to regulate market behavior and boost investor confidence with restrictions on securities lending, which analysts said on Sunday will help curb short-selling and boost investor confidence.

The China Securities Regulatory Commission (CSRC) issued a statement on Saturday, saying that in order to enhance counter-cyclical adjustments in the securities lending business, and in response to current market conditions, it will strengthen the management of securities lending and restrict lending of shares by heavyweight strategic investors.

On the borrowers' side, the margin ratio for securities lending has been raised from a minimum of 50 percent to 80 percent, and the margin ratio for private securities investment funds has been raised to 100 percent, the CSRC said.

On the lending side, adjustments will be made to the lending of shares allocated to strategic investors. For instance, senior company executives and key employees of listed companies can no longer lend their shares through participation in special asset management plans.

There will also be moderate tightening of regulations regarding the lending methods and proportions of other strategic investors during the early stages of an IPO, according to the statement.

The CSRC will intensify oversight of improper arbitrage, enhance regulatory enforcement, and impose stringent penalties for any violations.

Securities lending is an investment strategy in which investors anticipate a decline in stock prices. They borrow stocks from a brokerage firm and sell them in the current market, with the intention of repurchasing the shares when prices fall and then returning them to the brokerage firm.

Given current market conditions, a moderate increase in the margin requirement is conducive to leveraging the counter-cyclical regulatory function of securities lending and promoting the stable and orderly development of the business, analysts said.

The move comes amid growing market concerns over short-selling. Recently, East China's Shandong Province-based Golden Empire Precision Machinery Technology drew broad criticism from market participants after the company's senior management and key employees lent their holdings to other investors for sale on the company's debut at the Shanghai bourse.

The optimization of the rules will lead to a reduction in short-selling volume, which is important in boosting investor confidence, activating the capital market, and alleviating concerns among investors about certain hedge funds and other market participants using short-selling for speculation, Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management Co, told the Global Times on Sunday.

The CSRC has taken other moves targeting financial services, trading and investment. The measures, aimed at boosting investor confidence, will gradually form a stronger coordinated effect, Yang said.

Further research and improvement will be needed into overall securities margin trading mechanisms, the strategic investor allocation system, and the IPO pricing mechanism, Dong Shaopeng, a senior research fellow at the Chongyang Institute for Financial Studies at the Renmin University of China, told the Global Times on Sunday.