China to Allow Short Selling and Margin Trading. What Will Happen

Saturday, October 11, 2008 18:58
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18 months ago, all everyone was talking about was the stock market.  It was some 500% above its 2 year low, and we were finally able to break way from talking about real estate around the dinner table.

That was until it fell some 60%.

The Shanghai market has been one that I have followed with a bit of amusement in my time here.  5 years ago it was still the only down market in the world when you considered the fact that it had positive GDP growth… and that was only the more amusing (scary) given the country had been putting up double digit growth figures for 10-12 years consecutively.

At the peak of an global economic crisis were more banks are expected to fail, and a global slowdown is almost in the bag, China as decided that it is time to launch its next series of financial market reforms: to allow short selling (on a limited basis) and to allow for margin trading (on a limited basis)

Where I find this interesting is really as a spectator.  These are surely steps towards creating a mature market in the long term, but I will be interested as a spectator in the short term to see what happens as the market was alrady hitting its lower trading limits.

Some questions:

1) Who will be the people to margin up?  Savvy investors who understand credit or people who are looking to hit it big?

2) Of the 136 million personal investors, what percentage will be granted access and what are the requirements for qualifying?  Even in the States during the 90s there were some basic qualifications before eTrade or Schwab were going to give a customer some juice

3) in a panic situation, like the last couple of weeks, what will be the impact of these instruments as devices to stabilize or destabilize the market?

for more on this issue, I suggest you read the China Stakes article Shorting on the Chinese Market: Stabilizer or Distorter?

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