China set to bolster short selling China is poised to unveil measures to bolster the country's nascent short selling industry in an effort to deepen its capital markets, according to securities officials and fund managers. Beijing will create a new body called the Centralised Securities Lending Exchange to facilitate short selling as early as this quarter. China Securities Regulatory Commission, the main regulatory body for brokerages, will be the largest shareholder in the body, which was first mooted last year. IN Markets China embraced short selling in 2010, and the move to facilitate the practice comes at a time when regulators elsewhere in both developed and emerging markets are grappling with the downside of the short selling, which can add to rather than diminish volatility and feed on itself. The move follows previous efforts to promote short selling that have had little impact as they made shorting expensive and because shares available for qualified asset managers to borrow were scarce. Securities firms, including Citic Securities, believe Beijing's move will spur the development of a serious hedge fund industry in China as well as an expansion of its hitherto under-developed prime services business. "We expect our prime services business to grow if the centralised securities lending exchange is launched," Citic said in September. At the moment, China's hedge fund industry is dominated by less regulated so-called "sunshine funds" which target wealthy individuals and are the closest thing China has to hedge funds. According to The Securities Association of China, there were 400 such funds operating in China at the end of 2010. "As the regulatory environment evolves, sunshine private funds may be presented with opportunities to transform into hedge fund institutions," Citic said. Chinese security firm officials say the timing of the introduction of the new measures may also have been affected by the recent leadership shuffle at the CSRC which saw Guo Shuqing, the former chairman of China Construction Bank, become the regulatory body's new chairman. As a technique that enables investors to profit from falling stock prices, short selling has often been criticised during periods of market volatility. Beijing is moving cautiously, taking care to retain control of the process. Some asset managers say the prospect of the new rules was one reason that Chinese stock markets were among the world's worst performers in 2011, with the Shanghai Composite index down almost 22 per cent for the year. Other shareholders in the CSLE will include the country's two stock exchanges, in Shanghai and Shenzhen, as well as brokerage firms and other financial institutions. It is not clear which firms will be involved, but in early 2010 just six had licences to engage in securities lending and margin financing, while at the end of that year, only 25 brokerages had licences to provide prime services. The new centralised lending exchange will for a fee make available shares of individual companies to qualified fund managers in China who wish to borrow them. It will source the shares from institutions in China including banks, insurers and fund management firms. Currently, qualified fund managers can only borrow shares owned by the individual brokerage firms and both the securities firms and the fund managers must meet high asset requirements to do so, discouraging such activity. Margin financing remains seriously under-developed, and just 285 stocks are allowed to be traded on margin. Additional reporting by Simon Rabinovitch in Beijing