Bears and short-sellers dare not wade into China’s equity slump for fear of regulator’s wrath

A curious thing is happening in Chinese stocks, as the benchmark index of Asia’s largest bourse hurtles toward the worst bear market slump since 2015: the short-sellers are nowhere in sight.

Short interest was a minuscule 0.8 per cent of outstanding long interests on July 25, according to China Securities Finance’s data, which means there are far fewer investors betting on the declining market than traders who are invested in advancing prices.

The gap leaves investors vulnerable without a hedge to cushion their bets, so they just give up and leave the market. What follows next is further declines in stock prices as more investors clear their positions, traders said.

“The best way for us to hedge against risks in a declining market is to cut stock holdings,” said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai. “Short-selling bears pretty high costs and there are not many stocks that can be easily borrowed.”

In some ways, it is a crisis of the regulator’s own making. The China Securities Regulatory Commission (CSRC) had never looked favourably upon the practice, where traders are allowed to sell securities – even without owning them – with a plan to buy them back at a lower price in future, pocketing the difference as profit.

The regulator made 991 stocks and exchange-traded funds available for short-selling, out of a total of 3,586 equities and funds in the world’s second-largest capital market. Since its 2012 inception, short-selling has expanded fivefold in China, less than half the growth size of leveraged purchases over the same period.