21 September 2019
Chinese investors have been rattled by the steep slide in equity prices until drastic government measures helped stabilize the markets -- for now. Photo: Reuters
Chinese investors have been rattled by the steep slide in equity prices until drastic government measures helped stabilize the markets -- for now. Photo: Reuters

Who shorted the A-share markets last week?

There has been intense speculation recently regarding short-selling activities in China’s A-shares. Some believe that global financial players should take the blame, while others feel that such accusations are unjustified.

An American official has denied that US investors have been short-selling Chinese stocks, and suggested that the selloff stems from domestic factors.

“Foreign investors have very limited presence in China’s A-shares market. From that perspective, investors who dumped stocks are from the domestic market,” the official said, adding that China’s financial markets, including the equity markets, do not have significant links with the outside world.

Apart from the US, other nations have also declared their innocence in short-selling A-shares.

China’s public security ministry, meanwhile, has said that it will crack down on illegal activity including malicious short-selling of shares and stock futures.

Hedge fund billionaire George Soros and other moguls have said that they are standing with Chinese authorities. They stressed that they haven’t sold any A-shares, and that they actually started accumulating the stocks since July 8.

And some even predicted that A-shares will see an upturn after reaching the bottom.

Some global investment banks and financial institutions have also changed their tone, and are now relatively bullish on Chinese equities.

Frankly speaking, some of these financial institutions had not been consistent in the past with regard to their views on A-shares. They once predicted that a benchmark index would soar to a record high of 10,000 points, and then later gave a gloomy forecast that the index may plunge to around the 2,000-points level.

Given the dramatic change in pronouncements, many mainland investors tend to blame foreign investors for manipulating the market and trying to make quick money.

China’s stock market saw some panic-selling early last week. That has stoked wide-spreading worries about short sellers.

Some mainland experts noted that short-sellers were well-prepared and knew quite well about the leveraging and allocation of mutual funds and private-equity funds. The sellers used different tactics at different stages, and utilized a number of derivatives like CSI 500 index futures and ETFs, it was alleged.

However, the reality is that global investors still have difficulty in short-selling A-shares, given the fact that the Chinese market is not fully open to outsiders.

Foreign investors account for just 2 percent of the total market scale in China. By contrast, foreign funds represent around 30 percent of the markets in Taiwan, South Korea and some emerging markets in the Asia Pacific.

China has unveiled a number of initiatives like QFII, RQFII, Shanghai-Hong Kong Stock Connect, and mutual recognition of funds program. However, these schemes are yet to full optimized, and the A shares are not fully accessible for global investors.

In addition, global hot money cannot easily flow into the domestic market given the fact that the renminbi is not fully convertible.

Domestic and foreign funds are both chasing profits. Some foreign investors may have been more aggressive in their strategies as they can’t ignore the economic shocks of a stock market meltdown. But that is not the full story.

This article appeared in the Hong Kong Economic Journal on July 13. 

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker