China watchers are buzzing about the move to allow equity shorting, a major development that could ultimately open a number of trading strategies. The China Securities Regulatory Commission has announced a short-selling trial period for local securities houses beginning next month. "This is clearly a positive step forward," said James Rodríguez de Castro, managing director in global equity markets at Merrill Lynch in Hong Kong.
Short selling will be limited to a handful of domestic houses for the trial but the mechanism will likely be extended to foreign qualified institutional investors, according to Winston Wenyan Ma, author of Investing in China-New Opportunities in a Transforming Stock Market, based in New York. He said offshore clients will be able to put on synthetic short positions through market-access products. "In the long term shorting will allow arbitrage traders to trade away price discrepancies among different markets for example, between the [onshore] A-share market and H-shares [in Hong Kong]," he said.
The trial will last several months and regulators are likely to keep a close eye on how soon firms can get to grips with executing the transactions.
Initial trades will at first be via private contracts, but market officials anticipate short positions will be standardized for the domestic stock exchanges. Market officials said a similar path was followed in recent years in China for bond repos whereby trading was first permitted between select interbank players for several months before further opening the market.