Beijing has approved the launch, on a trial basis, of stock index futures and the short selling of stocks, an important and long-awaited step in the development of China’s equity market.
Shorting stocks and trading index futures will allow traders to profit from falling as well as rising markets. They will also enable investors to hedge their positions against downturns in China’s notoriously volatile markets.
Peng Yunliang of Shanghai Securities said the announcement was “a milestone in China’s financial history”, although it could take some time to be fully implemented.
The China Securities Regulatory Commission said on Friday that the State Council, China’s cabinet, had approved the measures, although it might take three months to complete preparations for the launch of index futures.
The government also approved margin trading, under which investors borrow money from brokerages to buy shares.
In short sales, investors sell stock they do not own, betting that they will be able to buy it back at a lower price and profit from the difference.
The regulator said it would follow the principle of “test first, then expand”, and would select some companies to launch products on a trial basis.
But the statement left many questions unanswered, including which companies will participate, whether foreign groups will be included, and the exact timetable.
Chinese investors have been awaiting the introduction of stock index futures for more than three years, since the establishment in 2006 of the China Financial Futures Exchange in Shanghai. The exchange has been conducting mock trading since then and the regulator has been preparing guidelines for index futures and educating investors about risks.
It was not clear whether the futures launch would take place within the three-month period mentioned by the regulator, or be further delayed. The introduction of trial short selling and margin trading is expected to come first, but the timetable is uncertain. More than a year ago, the regulator announced that short selling and margin trading would be introduced on a trial basis, but that never happened.
“Like anything in China, it’s going to be limited,” said Fraser Howie, author of Privatizing China: Inside China’s Stock Markets.
He said the government would roll out the rules slowly and selectively, and could suspend them at times to influence the stock market.
Shanghai paves way for short selling
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