Why Reddit trading frenzy, short selling in China doesn’t work

BEIJING – The recent Wall Street short selling frenzy is unlikely to come to China, where there are many more market constraints.

Short selling refers to a trading strategy that allows investors to bet that a stock price or security will not fall.

To shorten stocks, investors borrow shares and sell them, then buy them back at a lower price later, and the profits made out of pocket. If the share price does not fall, the short seller will try to reduce losses by buying back the stock, which is now costing more.

Investors in mainland China have limited capacity to make short stocks – a sign that the local markets are still unusual. Strict regulation and online censorship in China also contribute to different investor behavior compared to US behavior.

Since last month, there are millions of individual investors has gathered into the WallStreetBets forum on Reddit, encouraging each other to stock shares of hedge funds that have been shortened, or a bet to fall in price.

Trading of traders through stockbrokers like the free Robinhood app caused stocks of stocks that were very scarce like GameStop, a video game retailer, to go up 400% in a week.

Shares of GameStop and others targeted by the Reddit community have fallen sharply since then – but not before some assets that pledged against them lost billions of dollars.

Here’s why analysts say something similar won’t happen in China:

First, the concept of short selling is relatively new and limited in the field of the country, where authorities are very vigilant to control risks.

Regulators only started allowing short selling about 10 years ago and it is still well below 1% of total market value.

The process is roughly the same as U.S. Traders ’profit by borrowing shares, selling them and then buying them back after prices fall.

But one difference in China is that regulators only allow investors to shorten a portion of stocks traded on the Shanghai and Shenzhen stock exchanges.

The list of stocks – about 1,600 or more of them – is constantly changing and usually only includes companies with good foundations, according to Bruce Pang, head of macro and strategy analysis at China Renaissance .

That contrasts with the short selling environment in the U.S., where niche funds typically select companies like GameStop for individual vulnerabilities in their businesses.

The limited ability to move Chinese stocks and 10% or 20% shares on daily price movements gives speculators more incentive to follow various strategies to make money, such as driving prices up before selling.

In the US, individual stock trading may be halted for excessive volatility, but prices may eventually rise or fall – such as a GameStop rise of more than 130% one day and a 44% fall the next.

Chinese regulators give priority to sustainability when formulating economic and fiscal policies – even if they want to improve the business environment by attracting more foreign investors and increasing the place of markets. stock in financing Chinese companies.

That mindset has impressed local stock investors, who tend to accept government support that means only Chinese stocks will rise. Local interpretation of official tokens has also boosted the momentum of profitability in the mainland stock market, leading to many of them being nicknamed “casino.”

But with millions of ordinary people, rather than institutions, gaining the upper hand over Chinese stock trading, regulators want to prevent widespread losses as a way to ensure sustainability.

That means authorities will take extra steps to control markets, and it would be very difficult for a large group of retail investors to fuel the recent frenzy seen in U.S. markets. .

All short stocks and online discussions about stocks are closely monitored, Pang said. So in a sense, investor protection in China is more than protection of more developed markets, he said.