China is poised to unveil measures to bolster the country’s nascent short-selling industry in an effort to deepen its capital markets, according to securities officials and fund managers.
Beijing will create a new body called the Centralised Securities Lending Exchange to facilitate short selling as early as this quarter. China Securities Regulatory Commission, the market regulator, will be the largest shareholder in the body, which was first mooted last year.
Short sellers sell borrowed shares in the hope of reaping a profit by buying the equivalent securities back later at a lower price and returning them to the lender.
The practice has been curbed in some markets on the grounds it can exacerbate volatility, and Beijing has care to retain control of its introduction and development. Defenders of the practice say it increases liquidity and provides income for shareholders who are willing to lend their securities.
China embraced short selling in 2010, but efforts to promote its use have been hampered by the limited number of shares available for qualified asset managers to borrow.
Other shareholders in the CSLE will include the Shanghai and Shenzhen stock exchanges, as well as brokerage firms and other financial institutions. It is not clear which firms will be involved, but in early 2010 just six had licenses to engage in securities lending and margin financing. At the end of that year, only 25 brokerages had licenses to provide a broader array of prime services.
The new centralized lending exchange will make shares available to qualified fund managers in China who wish to borrow them, for a fee. It will source the shares from institutions in China including banks, insurers and fund management firms.
Currently, qualified fund managers can only borrow shares owned by brokerage firms. Both parties must meet high asset requirements, discouraging such activity. Margin financing also remains under-developed, with just 285 stocks are allowed to be traded on margin.
Securities firms believe Beijing’s move will spur the development of the hedge fund industry. China’s hedge fund industry is dominated by less regulated “sunshine funds”, which target wealthy individuals and are the closest thing China has to hedge funds. According to The Securities Association of China, there were 400 such funds operating at the end of 2010.
According to Chinese brokerage executives, the timing of the introduction of the new measures may also have been affected by the recent leadership shuffle at the CSRC which saw Guo Shuqing, the former chairman of China Construction Bank, become the regulatory body’s new chairman.
Some asset managers say the prospect of the new rules was one reason that Chinese stock markets were among the world’s worst performers in 2011, with the Shanghai Composite index down almost 22 per cent for the year.
Additional reporting by Simon Rabinovitch in Beijing