An investor looks at an electronic board with stock information in a brokerage house in Nanjing, Jiangsu Province, China.
BEIJING – The recent short-selling frenzy on Wall Street is unlikely to come to China, where there are much more market restrictions.
Short selling refers to a trading strategy that allows investors to bet that the price of a stock or security will fall.
To sell a stock, investors borrow and sell stocks, then ideally buy them back later at a lower price and pocket the profits. If the stock price doesn't fall, the short seller will try to minimize losses by buying back the stock, which now costs more.
Investors in mainland China have limited options to sell stocks – a sign that the The local markets are not yet mature. Tight regulation and online censorship in China also contribute to different investor behavior than in the US.
Millions of individual investors since last month have accumulated on the WallStreetBets forum on Reddit, encouraging each other to bid for stocks of stocks that hedge funds have cut or the bet would fall in price.
A rush of trades through stockbrokers like the free Robinhood app caused stocks of heavily shortened stocks like GameStop, a video game retailer, to rise 400% in a week.
The stocks of GameStop and others targeted by the Reddit community have fallen dramatically since then – but not before some funds betting against them lost billions of dollars.
Why Chinese Stock Markets Are Different
Analysts say nothing similar is likely to happen in China for the following reasons:
First, the concept of short selling is relatively new and limited in scope in the country where the authorities are on high alert to control risk.
Regulators only started allowing short selling about 10 years ago, and they are still well below 1% of total market value.
The process is essentially the same as US traders making profits by borrowing, selling, and then buying back stocks after prices have fallen.
One difference in China, however, is that regulators only allow investors to sell part of the stocks traded on the Shanghai and Shenzhen stock exchanges.
The list of stocks – around 1,600 or more – changes regularly and typically only includes companies with good fundamentals, according to Bruce Pang, head of macro and strategy research at China Renaissance.
This is in contrast to the US short-selling environment, where dedicated funds typically select companies like GameStop based on perceived weaknesses in their business.
The limited ability to sell Chinese stocks and caps of 10% or 20% on daily price movements gives speculators a greater incentive to pursue various money-making strategies, such as: B. Increase prices before selling.
In the US, individual stock trading may be suspended due to excessive volatility, but prices can ultimately go up or down – like GameStop's 130% increase in one day and 44% the next.
Stability at all costs
Chinese regulators place a high value on stability in shaping economic and financial policies – even if they want to improve the business environment by attracting more foreign investors and strengthening the role of stock markets in financing Chinese companies.
This mentality has struck local stock investors, who tend to accept implicit government support, meaning that Chinese stocks will only go up. The local interpretation of official signals has also sparked speculation in the mainland stock market, leading many to refer to it as a "casino".
However, with millions of ordinary people dominating Chinese stock trading instead of institutions, regulators are keen to prevent widespread losses to ensure stability.
This means that the authorities will take additional precautions to control the markets and it would be very difficult for a large group of retail investors to instigate the frenzy that has recently been seen in US markets.
All short trades and online discussions about stocks are closely monitored, Pang said. In some ways, investor protection in China is greater than that of more developed markets, he added.