Equity market a dead end without short sale options

On August 27, China launched a pilot refinancing program which is ultimately intended to help securities brokerages expand the scope of their clients' margin trading and short selling activities. Unfortunately though, China's securities regulators are still dragging their heels when it comes to allowing brokerages to borrow securities for short sales amid concerns that an increase in such trading activity could further damage the country's ailing stock market.

Hopefully the government will rethink this position soon however, since the time is right to establish a mechanism to support short sales in the mainland in order to both help local investors hedge against losses from the torrid equity market and push mainland shares closer to their actual value based on their performances.

At present, investors in the mainland can only take long positions in the stock market, which means that investors will turn a profit only if their shares rise in value.

Yet, as sluggishness in overseas financial markets and the country's slowing economic growth batter A shares, fewer and fewer listed companies are seeing their stock prices rise. Without access to short positions and the opportunity to make money during periods of weakness, mainland markets are suffering from a liquidity drought as investors ditch their holdings and sideline their capital until more favorable conditions emerge.

But apart from giving investors more ways to benefit from the stock market, short selling will also bring companies' share prices more closely in line with their performances, a development which would eliminate many of the most poorly-managed and unprofitable companies from the market.

Once again, as investors only see gains from their shares when their prices go up, market participants, especially large institutional investors, often try to build up hype surrounding stocks they have positions in. In many cases, the companies themselves are more than willing to tolerate such behavior, which also benefits them. Exposed to such twisted market dynamics, it's hard for investors to determine whether a company's stock is the next big blue chip or simply overheated junk.

China's government and securities regulators have already made admirable efforts in recent months to clean up the country's blustery equity market - for example, authorities recently introduced a tough new series of delisting rules which would eject the worst performing firms from mainland bourses. For the sake of investors nationwide though, the next step needs to be creating more short sale opportunities to allow investors to chance a profit during both bull and bear markets.