Chapter 20 - New Regulatory Developments for Short Selling in Asia: A Review

Abstract

This chapter provides a comprehensive review of major Asian regulations on short selling. Short selling in Asia has historically been relatively difficult, but the associated rules are increasingly being relaxed to allow the practice under certain circumstances. Interestingly, many short selling constraints imposed in Asia are reminiscent of short sale regulations in the United States of the early 1930s. Certain countries allow covered short sales but not naked shorts, others impose an uptick rule, and some restrict the list of stocks that may be shorted and/or the mechanism by which the short sell may be executed. Again, some countries allow short selling for retail investors but prohibit institutional investors. This chapter discusses the development of securities lending and short selling in mainland China, which is expected to enable the development of China-based hedge funds arbitraging away price inefficiencies in the China market. In stark contrast to its peers, China seems to be the only market going against the tide and plans to facilitate short selling in the near future. Surprisingly, it is also one of the few markets where no detailed operational guidance for short selling has been issued so far. Extremely high valuations and bubbles should become less frequent once investors have a way to play against them. More importantly, the ability to short should help in exploiting the massive price differentials among the various exchanges trading Chinese equities.