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Why the Reddit trading frenzy and short selling won’t work in China

An investor looks at an electronic board showing stock information at a brokerage house in Nanjing, Jiangsu province, China.

Reuters

BEIJING — The recent short selling frenzy on Wall Street will not likely come to China, where there are many more market restrictions.

Short selling refers to a trading strategy that allows investors to bet that the price of a stock or security will fall.

To short a stock, investors borrow shares and sell them, then ideally buy them back at a lower price later, and pocket the profits made. If the share price does not drop, the short seller will try to minimize losses by buying back the stock, which now costs more.

Investors in mainland China have a limited ability to short stocks — a sign that the local markets are still immature. Tight regulation and online censorship in China also contribute to different investor behavior versus that of the U.S.

Since last month, millions of individual investors have piled into the WallStreetBets forum on Reddit, encouraging one another to bid up shares of stocks that hedge funds have shorted, or bet would fall in price.

A rush of trades through stock brokers like the free Robinhood app caused shares of heavily shorted stocks like GameStop, a video game retailer, to surge 400% in a week.

Shares of GameStop and others that were targeted by the Reddit community have since fallen drastically — but not before some funds betting against them lost billions of dollars.

Why Chinese stock markets are different

Stability at all costs

Chinese regulators prioritize stability when forming economic and financial policies — even if they would like to improve the business environment by attracting more foreign investors and increasing the role of stock markets in financing Chinese companies.

That mentality has affected local stock investors, who tend to assume implicit government support means Chinese stocks will only rise. Local interpretation of official signals have also spurred bouts of speculation in the mainland stock market, causing many to nickname it a “casino.”

But with millions of ordinary individuals, rather than institutions, dominating Chinese stock trading, regulators are keen to prevent widespread losses as a way of ensuring stability.

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

All short trades and online discussion of stocks are closely monitored, Pang said. So in a sense, protection of investors in China is greater than that of more developed markets, he added.


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