Developing Short-Selling on the Mainland Chinese Equity Markets

Short-selling is not currently permitted on the mainland Chinese stock exchanges, but is allowed in most other major stock markets. We review the theory and evidence on liquidity, price discovery and market efficiency associated with securities lending and short-selling. The evidence highlights a number of benefits and also risks associated with these practices. We describe the approaches taken by the Hong Kong and Taiwan stock exchanges to develop short-selling and build on this to generate ideas for the development of securities lending and short-selling in mainland China. We argue that a phased program of reform, well-implemented, can help build confidence in the main-land Chinese equity markets, by aiding price discovery and improving market liquidity. This work will be of interest to policy makers, regulators and investors in the Chinese equity markets.