Short selling of shares by foreigners is not to blame for China’s stock meltdown, according to a new study of official figures by financial data firm Markit. “Chinese market regulators have turned to a familiar protagonist in order to explain the recent rout in [the] domestic market; short sellers. But securities lending data shows that this accusation is by and large overblown,” said Markit analyst Relte Stephen Schutte. Official data reveals only minimal short selling in individual mainland listed shares and short selling of domestic exchange traded funds (ETFs) stands at just 1.2 per cent of total domestic ETF assets under management. And while there is foreign demand to sell short via ETFs – essentially to bet on further falls in price – the cost of doing so is making it prohibitively expensive, Schutte’s study found. Investors wanting to take short positions in a stock must first borrow it from an existing owner. The higher the cost of borrowing, the more prices must fall to make the trade profitable. The Deutsche X-trackers Harvest CSI300 China A-shares ETF is the most in demand ETF from short sellers, since the instrument offers investors a exposure to the 300 most liquid mainland stocks, but the cost to borrow is 29 per cent. That is far in excess of the 8 per cent charged to borrow stock in the Deutsche X-trackers Harvest CSI 500 China A-Shares small cap ETF which tracks the movements in 500 companies listed in Shanghai and Shenzhen. It is the most shorted ETF, with 53 per cent of shares outstanding on loan. ETFs have become increasingly popular for both domestic and international investors seeking exposure to the volatile mainland equity market. More than US$100 billion of funds now track mainland markets via ETFs, with 57 per cent of the instruments available listed on exchanges in Shanghai and Shenzhen. “These funds see no significant levels of short interest,” the report said, citing securities lending data on ETFs. Domestic investors poured a record 57.6 billion yuan (HK$72.9 billion) in July into money market ETFs in China as they tried to shield their money from the fall in equity values. Short exposure instead has come via US- and Hong Kong-listed ETFs as these essentially circumvent measures by Beijing to curb selling. And it is the small-cap sector – not the major market heavyweights – that appear to be the targets for foreign sellers. The Market Vectors Chinaamc Sme-Chinext ETF is the second most short sold China ETF. The US$46 billion fund, which tracks small and medium-size companies traded on the SME Board and the ChiNext Board of the Shenzhen Stock Exchange, has 35 per cent of its shares outstanding on loan. The China Securities Regulatory Commission, the country’s market regulator, said it was investigating investors who used stock index futures to short the market, but foreign fund managers own less than 3 per cent of Chinese stocks, with retail investors more than 80 per cent.