Developing short-selling on the mainland Chinese equity markets

Abstract

We review the theory and evidence on liquidity, price discovery and market efficiency associated with securities lending and short-selling. We also study the efforts by the Hong Kong and Taiwan stock exchanges to develop short-selling. We build on this to generate ideas for the development of securities lending and short-selling in mainland China. We argue that a phased program of reform, well-implemented, can help build confidence in the mainland Chinese equity markets, by aiding price discovery and improving market liquidity. JEL classification: G15; G18