The mainland authorities' recent approval of margin trading, short selling and stock index futures contracts is bound to reignite the age-old argument over whether these financial innovations, and index futures especially, heighten or reduce volatility in the underlying equity markets.
Judging solely from the reception given to the State Council's January 8 announcement, you would have little doubt that the introduction of the new trading tools would be a positive step for mainland market development.
Supporters of the innovations make a powerful case in their favour. Margin trading - leveraging up the size of your positions with money borrowed from your broker - will improve stock market liquidity, which in turn will improve the overall efficiency of the market.
At the same time, short selling will allow investors to adopt new strategies, encouraging more players to enter the market. Bearish investors will be able to implement their views for the first time by selling stocks short. Meanwhile, value-driven investors will be able to play, anticipating convergence between individual shares while eliminating overall market risk.
For example, in the car sector, they could sell short a stock perceived as overvalued, like BYD, offsetting the exposure by going long shares in a company seen as relatively underpriced, like Denway Motors.
Similarly, for the first time, they will be able directly to arbitrage the price differentials between mainland-listed A shares and Hong Kong-listed H shares, in theory helping to prevent some of the price overshoots and distortions that characterise the mainland market.