Short selling is the sale of a security that the seller does not own and is borrowed. Short sellers believe that the price of a security will decline in the near future, and can be bought back at a lower price to make a profit.

How Short Selling in China Started

The Chinese stock market has a very limited history of short sales. Starting in 2007, the Chinese government, in an effort to increase the types of financial instruments available to market participants, considered introducing short selling to the market.

By 2008, the China Securities Regulatory Commission (CSRC) announced that it would introduce margin trading and short selling on a trial basis, which was briefly delayed due to preparations for the 2008 Summer Olympics. After the Olympics concluded, a group of 11 top brokerage firms in China — including CITIC and Haitong Securities — received authorization to start the trial short sales program.

In March 2010, the CSRC began to allow a limited number of stocks to be sold short or bought on margin. It started with fewer than 100 stocks, but over the next few years climbed to nearly 700.

The CSRC issued guidelines stating that both short selling and margin buying were to be allowed for eligible "blue chip" stocks with good earnings performance and minimal volatility. Firms were required to disclose short-selling trading information on a daily basis before 9:00 a.m. on the next trading day.

Regulations Following the Stock Market Crash

In the middle of 2015, many Chinese trading firms voluntarily — with pressure from the government — halted all stock-shorting activities during the country's stock market crash. The CSRC began to crackdown on “malicious short sellers” whose high-frequency trading practices were believed to be akin to market manipulation. By August of the same year, regulators discontinued the practice of same-day transaction settlements for short-sellers.

Regulators say they were looking to eliminate a practice where a trader submits an order but quickly withdraws it before the trade is completed, known as "spoofing." 

By March 2016, short-selling had resumed at a number of brokerages. In May 2017, a set of revised rules designed to strengthen and stabilize Chinese markets was announced. One of the key provisions included regulating sales by major shareholders of listed companies.

(To learn more, see our Short Selling Tutorial.)

  1. Why Is Short Selling Illegal in Some Countries?

    Discover why many countries banned the practice of short selling financial stocks—but not the US. Read Answer >>
  2. What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being ... Read Answer >>
  3. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks ... Read Answer >>
  4. Here's What Short Sellers Must Do to Short a Stock

    Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
Related Articles
  1. Trading

    Why is Short Selling Legal? A Brief History

    Short selling -- selling borrowed stock in hopes the price goes down --used to be unregulated.
  2. Investing

    How To Short Amazon Stock

    With the stock reaching all-time highs and the company gambling on several new business lines, many investors may feel it's a good time to short sell Amazon.
  3. Personal Finance

    Short Selling: Making The Ban

    Short selling has been around as long as the stock market, and it hasn't always been looked on favorably.
  4. Investing

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  5. Trading

    An Overview Of Short Selling

    Short selling is not as harmful as people think, and actually serves an important function in the market.
  6. Trading

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  7. Difference Between Short Selling And Put Options

    Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.
  1. Short Selling

    Short selling is the sale of a security that is not owned by ...
  2. Short Covering

    Short covering is buying back borrowed securities in order to ...
  3. Short Interest Ratio

    A sentiment indicator that is derived by dividing the short interest ...
  4. Buy To Cover

    A buy order made on a stock or other listed security that closes ...
  5. Net Short

    Net short is a portfolio or trading position leveraged to an ...
  6. Rebate

    1. In a short-sale transaction, the portion of interest or dividends ...
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center