An investor looks at an electronic board with stock information at a brokerage house in Nanjing, Jiangsu Province, China.
Reuters
BEIJING – The recent short-selling frenzy on Wall Street is unlikely to come in China, where there are many more market constraints.
Short selling refers to a trading strategy that allows investors to bet that the price of a stock or security will fall.
To short a stock, investors borrow shares and sell them, and then buy them back later at a lower price and hide the profit they earn. If the stock price does not fall, the short seller will try to minimize losses by buying back the stock, which now costs more.
Investors in mainland China have a limited ability to shorten stocks – a sign that the local markets are still immature. Strict regulation and online censorship in China also contribute to different investor behavior towards the US
Since last month, millions of individual investors piled up on the WallStreetBets forum on Reddit and encouraged each other to offer stocks that would bet, that hedge funds shorted, or that would fall in price.
The rush of stocks by stockbrokers like the free Robinhood app has led to shares of heavily shorted stocks like GameStop, a retailer of video games, rising 400% within a week.
Shares of GameStop and others targeted by the Reddit community have dropped dramatically since then – but not before some funds that bet against them lost billions of dollars.
Why Chinese stock markets differ
This is why analysts say something similar is unlikely to happen in China:
In the first place, the concept of short selling is relatively new and limited in scope in the country, where authorities are very vigilant in controlling risks.
Regulators only started allowing short sales about ten years ago and it remains well below 1% of the total market value.
The process is essentially the same as what US traders make profit by borrowing, selling and then buying back shares after prices fall.
But one difference in China is that regulators only allow investors to short a portion of the shares traded on the stock exchanges in Shanghai and Shenzhen.
According to Bruce Pang, head of macro and strategy research at China Renaissance, the list of stocks – about 1,600 or more – changes frequently and only includes companies with good fundamentals.
This contrasts with the short-selling environment in the US, where dedicated funds usually choose companies like GameStop due to weak weaknesses in their businesses.
Limited ability to shorten Chinese stocks and limits of 10% or 20% on daily price movements gives speculators more incentive to pursue different money-making strategies, such as raising prices before selling.
In the US, trading of individual stocks may be interrupted for excessive volatility, but prices may eventually rise or fall – such as GameStop’s rise of more than 130% one day and 44% the next.
Stability at all costs
Chinese regulators prefer stability in economic and financial policy-making – even if they want to improve the business environment by attracting more foreign investors and increasing the role of stock markets in financing Chinese companies.
This mentality has affected local equity investors, who tend to accept implicit government support, meaning Chinese shares will only rise. Local interpretation of official signals has also sparked speculation on the mainland stock market, prompting many people to call it a ‘casino’.
But with millions of ordinary individuals, rather than institutions, dominating Chinese stock trading, regulators are eager to prevent widespread losses to ensure stability.
This means that authorities will take extra precautions to control markets, and it will be very difficult for a large group of retail investors to stir up the madness that has recently been seen in US markets.
Pang closely monitored all short trading and online discussion of stocks. In a sense, the protection of investors in China is greater than that of more developed markets, he added.