Chinese regulators announced on Monday that the daily trade volume in the CSI 500 Futures Index will be reduced in hopes of keeping China's Stock markets from slipping further.

Xinhua reported that effective Tuesday, market players will only be allowed to trade up to 1,200 lots on their buy or sell orders, according to officials at China Financial Futures Exchange (CFFEX).

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According to Bloomberg Business, the latest ruling is meant to discourage short selling, which authorities believe is one of the main reason for recent big declines in the Chinese stock market.

Short sellers are reportedly spreading false information about the value of Chinese stocks. At the same time foreigners are rushing to sell their holdings in Chinese stocks. These two situations are allegedly the reasons why China's stock market lose more that $3 trillion within three weeks of trade.

Future exchange officials also said that they are intensifying their campaign to seek out signs "illegal manipulation" in the value of shares traded in the Chinese stock index.

On Monday, trade in Chinese stocks rose briefly after three weeks of decline. The Shanghai stock market closed in positive territory at almost 2.5 percent or total points of around 3,776. But at the end of trading on Tuesday, the Shanghai Composite Index had fallen by aout 1.29% to 3,727.12.

A series of incentives released by the various financial agencies in China is believed to have arrested further declines in the Chinese stock index, according to Want China Times. Last week, Brokerage and mutual fund companies pledged to invest part of their assets in the Chinese stocks.

Xinhu Futures Analyst Jiang Lin understands what the authorities are trying to accomplish by placing a cap on the amount of trade in the futures index. He does not believe, however, that it could prevent further fall of Chinese stocks if the selling momentum is still strong among investors.

Short selling is a common practice among stock market traders in hedging their holdings against possible increase or decrease in the future value of stocks. Major stock markets like China permit and regulate the futures index trade.

Authorities also announced on Monday that exchange officials will closely monitor the trade and will not hesitate to investigate any player who violates the current laws in place.

TagsChina stock market, Shanghai Composite Index, shanghai stock market, China Finacial Futures exchange, Chinese Stock Market