BREAKINGVIEWS-Chinese short-selling will be no bear’s picnic

January 25, 2010

By Wei Gu

HONG KONG, Jan 25 (Reuters Breakingviews) – Hedge funds watching China’s markets are licking their lips at what they see as the best shorting opportunity since Enron. But while plans to allow short-selling are imminent, this won’t be a bear’s picnic. Beijing’s plans to allow two-way equity bets will give foreigners little chance. Borrowing individual stocks will be tricky, even for locals.

After many countries such as the United States and UK put more severe restrictions on short-selling, China is taking the contrarian view. The short-selling regime has been three years in the making. The goal is to allow investors to express a different view on the market, and prevent market valuations getting overly stretched.

For now, foreigners are not invited. They can only short the broad market though index futures, not individual stocks. Foreigners now own up to $15 billion of China stocks through the qualified foreign institutional investor scheme. Their shorting quota is unlikely to exceed 10 percent, or $1.5 billion — just 5 percent of the daily turnover.

But even locals won’t get much of a look-in. Brokerage firms will only be able to lend out stocks that they own, unlike other markets where short-sellers can borrow from pension funds, insurance companies, and custodian banks. Chinese insurance companies, who buy and sell at a rapid rate, are unlikely to lend stocks out for a long period anyway.

Even limited short-selling may sound better than none. Except the market regulators are also making it easier for stocks to go up, by enabling trading on margin. Investors can soon buy index futures with just a 12 percent cash outlay, and borrow the rest. Chinese mutual funds look stretched now with 84 percent of their money already invested into stocks, which is a record. Margin trading will give them more firepower.

China always likes to cross the water by feeling the stones. Since the idea of short-selling is a political hot potato, and many of the stocks listed in China have substantial state ownership, fear of bears running rampant is understandable. That is a shame: with the Shanghai index trading at half its 2007 peak, now would have been a good time for bolder changes.


— China’s State Council approved in principle the use of hedging tools such as short selling, stock index futures and trading on margin in January, after at least three years of preparation work. Index futures will take about three months to start up, while margin trading and short selling could begin soon, said the securities regulator.

— The Financial Futures Exchange plans to limit the amount investors can borrow for index futures at 88 percent of the contract’s value, down from earlier plans of 90 percent. Each investor can have a maximum of 100 contracts, rather than the previously planned 600.

— The China Securities Regulatory Commission (CSRC) said in draft regulations on the index futures that individuals wishing to trade in them must have 500,000 yuan ($73,250) to open a new account and must pass an examination on futures trading.

— The author is a Reuters Breakingviews columnist. The opinions expressed are her own —


(Editing by John Foley and David Evans)

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