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.
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The practice has been curbed in some markets on the grounds it can exacerbate volatility, and Beijing has taken 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 licences to engage in securities lending and margin financing. At the end of that year, only 25 brokerages had licences to provide a broader array of prime services.
The new centralised 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.