(Yicai) June 17 -- Following an online rumor of a resurgence in securities lending, China’s market watchdog said a recent spike had to do with a periodic adjustment in key stock indexes and there has been no shift in the country’s strict stance on the activity.

The jump in securities lending on June 12 was mainly due to the semi-annual rebalancing of benchmarks, with the lent out shares of constituents removed from the indexes being recalled and those of newly added constituents being loaned out, the China Securities Regulatory Commission said yesterday.

The rumor circulating on social media over the past weekend said securities lending -- where financial institutions temporarily transfer shares they own to brokers for loan to short-sellers for a fee -- has made a comeback. It noted that on June 12, the CSRC’s website showed an increase of nearly 170 million shares, fueling a stock market decline in recent days.

The CSRC said 860 shares were recalled on June 11 and 50 million on June 12, while 280 million and 170 million were lent on those two days, resulting in a net reduction of 460 million. During that week, the balance of securities lending fell 14 percent, or CNY5.4 billion (USD744.2 million), it noted.

Stock market indexes are adjusted every six months, entailing the removal and addition of companies, a market source told Yicai. The Shenzhen Component Index was tweaked on June 12 and the China Securities Index on June 14. This resulted in the key CSI 500 and CSI 1000 benchmarks changing 10 percent of their constituents, or 150 firms.

As a consequence of the rebalancing, securities lenders and short-sellers adjusted their hedging strategies, triggering a retrieval of shares in companies no longer in the indexes and lending out shares in newly included ones, the source said, adding that this happens every six months and is normal market behavior.

Since last year, the CSRC has taken a series of steps to steady the stock market, such as capping the scale of shares for securities lending, banning the lending of restricted shares, or those offered to investors or employees with lockup periods, reducing the efficiency of securities refinancing, and prohibiting the use of securities financing to reduce holdings and cash out.

Editor: Kim Taylor