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China securities regulator denies encouraging short selling

SHANGHAI (Reuters) - China's recent liberalisation of stock short-selling rules is not intended to encourage the practice, the China Securities Regulatory Commission (CSRC) said on Saturday, after overseas markets dropped sharply in response to the move.

In a post on its official microblog account, the CSRC published a transcript of a journalist question and answer session in which it was asked whether the goal of the policy was to encourage short-selling and depress the stock market.

"This is a misunderstanding, a misreading," the CSRC said.

"This sort of trade is a mature mechanism used in overseas markets, it helps moderate volatility and help with price discovery and hedging against risk ... It is certainly not encouraging shorting as has been said, even less an attempt to suppress the market."

Short-selling involves borrowing stock in order to sell it, with the aim of buying it back more cheaply and thereby make a profit. The practice has been blamed in some countries for sharp falls in stock markets.

Chinese regulators said on Friday, after mainland markets had closed, they would allow fund managers to lend shares for short-selling, and would also expand the number of stocks investors can short sell, in a bid to raise the supply of securities in the market.

Institutional investors including mutual fund companies and asset management businesses of securities firms are encouraged to lend stocks because the "margin financing business has been growing rapidly, but the business of short-selling has been developing slowly," the Shanghai and Shenzhen stock exchanges said in a statement.

Some traders blamed a fall in overseas markets on the news, with the S&P 500 posted its biggest percentage loss since March 25.

Bourses in mainland China and in Hong Kong have been surging in recent months, as Chinese investors pile into both markets, many of them making heavily leveraged bets that the bull run -- which has seen the CSI300 index rise over 87 percent in the last six months -- has further to run.

Major indexes hit seven-year highs on Friday, as retail investors rushed to open stock accounts and borrow a record amount of money to buy shares, pushing trading turnover to record highs.

Some expect the rally to continue with tacit policy support from Beijing, but others are worried it could come unhinged given the heavy presence of individual Chinese retail investors, many of them inexperienced, and the fact the rally is occurring while the rest of the economy shows signs of weakening.

In the past, short-selling was tightly restricted in China and most investors focused on making money on upside stock moves.

However, recent experiences with sharp short-term market corrections have shown -- in particular retail investors that conduct between 60-80 percent of transactions in Chinese stock markets -- lack adequate hedging options such as shorting.

(Reporting by Pete Sweeney; Editing by Mark Potter)