Foreign investors were given the chance to short-sell certain Shanghai-listed A shares for the first time through Stock Connect from March 2. But only exchange participants (EPs) can lend stocks to their clients under the scheme, which some believe is stifling the potential of the short-selling project.
“Under the current rules, only exchange participants are permitted to lend stocks, and they are brokers,” says Nick Ronalds, managing director and head of equities at the Asia Securities Industry and Financial Markets Association (Asifma). “The brokers do not have the inventory, and if you do not have the product, you can’t lend.”
He says thriving short-selling marketplaces have asset managers and custodians lending. “You also have agency lenders, which are specialist firms that provide things like administration and accounting services as well as sourcing of product,” he says. “It’s a specialized market that requires a particular business model, resources and skills. A company can’t do it casually as a sideline.”
Fundamental concern
The plan currently only allows for covered, rather than naked, short selling on the northbound route of Stock Connect. There are also short-selling curbs on each security, which amount to a 1% daily limit and a 5% cumulative limit over 10 trading days.
Martin Corrall, chairman of the Pan Asia Securities Lending Association, agrees that the fundamental concern with the Stock Connect stock borrowing and lending rules is participation.
“Typically, broker-dealers transact their businesses through offshore affiliates located in either New York or London/Europe, whereas their EP is merely a local execution entity with little or no inventory. Overhauling their business models would be impractical,” he says.
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“Additionally, the industry estimates in the region of 90% of liquidity comes from agent lenders and, as it stands, they are also excluded from participation. I would hope to see future amendments to the rules to accommodate our requests.”
Stock Connect increases ties between the Shanghai Stock Exchange and the Hong Kong Stock Exchange by allowing trade in both directions through mutual market access. The introduction of short selling could boost its attraction, but looser restrictions all round may first be required.
“When you look at the current restrictions on the new northbound short-selling initiative, they are extremely rigorous,” says Nicholas Britz, an analyst at Shanghai-based financial services consultancy, Z-Ben Advisors.
While volumes on the new short-selling scheme are underwhelming, Hong Kong Exchanges and Clearing Limited (HKEx) is realistic about the early aims of the project. “Initially, short sales of A shares are not expected to be active,” a HK Ex spokesman tells Euromoney. “It’s a starting point and we understand take-ups will require time.”