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Policy · Markets
Reddit-driven short selling gets dissipated in China, market mechanism curtails exuberance
2021/02/17 06:34:33

Feb 17, 2021 (China Knowledge) - Millions of retail investors had gathered into the WallStreetBets forum on Reddit, encouraging one another to push up GameStop (NYSE:GME) a video game retailer, to surge almost 400% in a week.  It is estimated that short-sellers, mainly made up of hedge funds, lost about USD12.7 billion after being short-squeezed by frantic supporters of WallStreetBets.

If this blind exuberance happened in China, such mania that artificial pushes a stock price will dissipate before a mess that could take regulators and SEC to resolve – above all, the ten over billions dollar conundrum will go unaccounted for, for the fact that the U.S legal and regulatory environment are complex and resource-draining.

Firstly, China authorities are on high alert for controlling risks and ensuring market stability. Chinese regulators only allowed short selling about 10 years ago and short selling of stocks only remained 1% or less of the total market value. That is why almost all so-called local or foreign hedge funds, usually value investors, long stocks and sell their holdings at higher prices.

Due to volatile swings in the past that brought massive losses to investors, especially the retail investors, the Chinese regulators only allow investors to short certain stocks traded on the Shanghai and Shenzhen stock exchanges. The list of stocks – around 1,600 (out of 4,300) of them were reviewed regularly ensuring that it only includes companies with strong fundamentals. This is vastly different in the short selling environment in the US where funds typically pick companies like GameStop (NYSE:GME) for perceived weaknesses in their business model.

The market circuit-breaker enacted by the Chinese government prevents panic selling and price stability as it is stated that stocks within the benchmark CSI300 index, falls 5% in a day – trading would be halted for 15 minutes, another 7% decline would trigger a halt in trading for the rest of the trading day. For individual stocks the maximum rise or decline per day is limited to 10% for mainboard stocks, and 20% cap for Nasdaq-like STAR Market’s shares (For more, refer to ‘China IPO Weekly’ and ‘China STAR Market’). In the US, trading of individual stocks might be halted for excessive volatility, but price can ultimately soar or plunge – like GameStop (NYSE:GME) surge of more than 130% and a 44% plunge the next in a single day.

To ensure market stability and protection for its citizens, Chinese regulators are inclined to prevent huge losses for some 160 million people with stock trading acct (U.S has 60 mln household accounts). This definitely prompted the Chinese government to take extra precautions to manage market volatilities, which will be impossible for a large group of retail investors to incite the short squeezing seen recently in the U.S markets.

Many foreigners and foreign media have had in the past stereotype the Chinese market as a ‘casino’, but such market and risk control mechanism are clear evidences that defeat such misleading biases. China’s precautionary measures are important safety nets and long-term development for its financial market.

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