short selling in China

First, sorry for being absent for a few week. I don't have a good excuse, since students are not supposed to be busy. But actually I am pretty busy. The classes in the second year are so good that I scarified some writing time for reading cases. I am also planning to do a start up on consumer Internet. hopefully I will bring more updates soon.

The biggest news this week is China started the trial on short selling, a big improvement in the capital market. I remember people have been talking this for many years, and the CSRC is smart to launch this now because the market is too low, almost at the bottom. Short selling will not hurt that much.

FT article:

Short selling may be out of favour, widely blamed as one of the most dangerous of the unregulated excesses of market capitalism, but China’s stock market regulators are apparently not worried by that.

Just as many countries have banned or restricting the practice, China announced at the weekend that it would proceed with the trial introduction of both margin trading and short selling of shares, in spite of the global turmoil.

Initially at least, the Shanghai stock market was unimpressed: the benchmark Shanghai Composite index closed down 5.23 per cent at 2,173 points on Monday, shrugging off the positive impact of the announcement entirely, and giving in to concerns about the health of the global economy instead.

Shanghai stocks were also playing catch-up: the mainland markets were closed last week for the Chinese national day holiday, so they were unable to react to market falls elsewhere in Asia until Monday.

On Sunday, partly as a further effort to support the flagging Shanghai stock market, the China Securities Regulatory Commission (CSRC) announced the cautious introduction of margin trading and short selling. The measures were meant to introduce “new vitality” to the stock market, the regulator said on its website.

It said only carefully selected brokerages would initially be permitted to offer such services, and the scale of any margin trading – buying shares with borrowed money – would far exceed that of short selling since brokerages have much more cash to lend to clients than shares. Traders expected the measures to lift the market.

But investors appear to have been too preoccupied by global market travails to care much about long-term reforms to the Chinese markets. “The fall today is a negative response towards the external market worldwide during the long holiday. The introduction of margin trading and short selling is a . . . technical enhancement with more long-term effect than immediate impact,” said Zhang Jichun of United Securities. “There is still a big lack of confidence among investors at the economic fundamentals,” especially a continuing slowdown in corporate profitability.

But the goal of the long-anticipated reforms is “much more than a simple market-saving effort. It is geared towards the institutional build-up of the Chinese financial market”, says Mr Zhang. The measures will increase liquidity and weed out amateur investors: “Those who can’t read the market will ultimately be filtered out.”

Jing Ulrich, head of China equities for JPMorgan, said: “The new trading mechanism will fundamentally change the ‘one-sided’ nature of the A-share market, allowing investors to profit from falling as well as rising markets.” She added that in the long term, securities lending should contribute to the stability of mainland markets.

But in the short term it could lead to further volatility “leveraging market participants’ capacity to engage in momentum trades on the expectation of falling or rising markets”.