China gets shorty | FT Alphaville

China gets shorty

In his latest move to support the development of China’s capital markets, Guo Shuqing, the newly installed head of the China Securities Regulatory Commission, will oversee the creation of a new body to control facilitate short-selling. The regulator is also going to be the largest shareholder of the new organisation.

FT Alphaville tips our hat to this rather neat piece of controlled capitalism. The venture will likely be a nice little money spinner for the CSRC, once the fees and transaction costs start rolling in.

As the FT reported on Wednesday, the new Centralised Securities Lending Exchange will make shares available to qualified fund managers based in China who wish to borrow them, for a fee. It will source the shares from domestic institutions including banks, insurers and fund management firms.

The move will assist fund managers seeking to hedge risk and diversify profit streams, while simultaneously allowing investors to earn fees from lending their stock out. All good things for China’s developing capital market.

Authorities also hope it will spur the development of the nascent hedge fund industry in China — which is currently made up of “sunshine funds” that target wealthy individuals.

Mere retail investors, meanwhile, are left with only scraps with banks deposits offering negative returns due to inflation and government controls. This has led to growth in private lending as well as more ‘esoteric’ investments.

The authorities no doubt have an eye on China’s recent capital outflow problems (over Rmb53bn -$8.3bn – left its shores in the last two months of 2011).

However, it is very clear that Beijing will be keen to keep the potentially volatile shorting sector firmly under its control. After all, it only began dipping its proverbial toe into the market in 2010. The toe may not like the kind of volatility shorting could bring, hence the “slowly and gently” approach.

So don’t expect the market to fly any time soon. Beijing will likely only let favoured institutions participate for the forseeable future (only 25 brokerages were admitted into the pilot scheme in 2010).

This is the bold move Mr Shuqing has made. Since taking the reigns in late October, he’s been cracking down on insider trading and nudging the door open to Chinese equities market for offshore investors to come in.

This latest move reinforces the impression that China sees a more open developed capital market in its future. Just not its immediate future. First dip the toe, then the foot.

Related links:
China names new financial regulators
– FT
Hendry’s ‘China short’ fund makes big returns
– FT