Short selling tests China’s zeal for market reform
Samuel Shen, Alun John, 19 June 2020
As the novel coronavirus swept the world this year, Chinese hedge fund manager Yuan Yuwei made lucrative short-selling bets against stocks such as New York-listed Starbucks Corp SBUX.O, Yum China Holdings Inc YUMC.N and Walt Disney Co DIS.N. At home, he barely bothered. “Short-selling is too inefficient in China. Either there are no available stocks to borrow, or it takes too long,” said Yuan, who runs a global macro fund for Olympus Hedge Fund Investments.
Short sellers sell borrowed shares in the hope of buying them back when prices fall and pocketing the difference. Those such as Carson Block of Muddy Waters and Dan David of Wolfpack Research have made their name shorting Chinese stocks but, like Yuan, their bets have been against stocks in New York or Hong Kong, not Shanghai or Shenzhen.
This could be about to change. Last Friday, regulators relaxed short-selling rules for Shenzhen’s $1 trillion (805 billion pounds) startup board, ChiNext, for domestic market participants. They are also considering letting foreigners borrow or lend mainland stocks to short.
Such reform could increase competitiveness and bring China’s markets a step closer to more robust capital-raising centres such as New York and Tokyo. Shares loaned for shorting in Shanghai and Shenzhen as of June 16 totalled $3.96 billion versus a stock market capitalisation of $8.9 trillion – a ratio of 0.044%, official data showed.
While markets do not calculate short data in exactly the same way, figures from IHS Markit show short interest in the United States of $780 billion, or 2.4% of market cap, and 1.5% for Tokyo.
