1 A Review of new Regulatory Developments for Short Selling in Asia: Francois-Serge Lhabitant and Jeannine Daniel

2 Reading Questions What are the key similarities and differences between shorting in the West and Asia? What are the various tools that Asian regulators have in the event that they wish to limit short selling activity. Is short selling possible in Asia? If so, which regions is it possible and which areas is it more difficult? What are the various options for Chinese Companies considering a share listing? Is it discriminatory to exclude QFII and other offshore investors from participating in the securities lending on Shanghai and Shenzen exchanges? Who are the six Chinese securities brokers granted a licence to participate in the program?

3 Short selling: Asia versus West WestAsia LiquidityMore readily available The lack of securities lending desks can make short selling more difficult Cost Leading to lower borrowing costs Limited supply of securities to short often means higher transaction costs Risk/Reward With the exception of tail events such as VW/Porsche less susceptible to short squeezes. More vulnerable to short squeezes due to lower free float Asia appear to be behind the curve in developing a more harmonious approach to short selling regulation. At least Europe appear to be making headway on this front………….. Similarities include approach/tools used by way of disclosure requirements and restrictions. Are there any others? ……..

4 Typical Short Selling Constraints Private Disclosure Public Disclosure Up Tick Rule Ban of Naked Short Sales A Ban on Covered Short Sales Which of these is the most onerous or restrictive for an investor? Answer. A total ban of covered short sales, as this makes it impossible for most market participants to short sell financial shares.

5 Asia: not necessarily an even playing field when it comes to shorting…… Two more developed regions for shorting would include Hong Kong and Japan. More difficult Asian Countries for shorting include Vietnam and Thailand.

Chinese Companies considering a share listing? Additional homework……what are the perceived advantages and disadvantages of each option? A shares: shares of Chinese companies listed in Shanghai or Shenzhen under Chinese law, and denominated in Renminbi. They are only available to Chinese nationals and to selected large foreign institutions (Qualified Foreign Institutional Investors, or QFII) through a quota system. B shares, a.k.a. Renminbi Special Shares, which are registered shares listed and traded in securities exchanges inside China, with a face value denominated in Renminbi but subscribed and traded in foreign currencies primarily by foreign investors. Since February 2001, domestic retail investors were allowed to trade B shares. However, B shares market capitalization only represents 2 to 3% of the A shares market capitalization. H shares, which are shares in Chinese companies issued in China under Chinese law, but listed on the Hong Kong Stock Exchange and subject to its stringent listing and disclosure requirements, and denominated in H.K. dollars. They are available to international investors with minimal restrictions. N shares for companies that are listed on the New York Stock Exchange, and more recently in Singapore (S shares) or in Australia. Most N-shares are traded in the form of ADRs with the underlying shares listed in Hong Kong. They are available to international investors with no restrictions. Since April 2006, Qualified Domestic Institutional Investors (QDII) are also allowed to access foreign security markets. So many choices…?

7 The chosen few…… Guotai Junan Securities Guosen Securities CITIC Securities Everbright Securities Haitong Securities GF Securities Securities lending was initially limited to stocks in the China Security Index CSI 300, and only proprietary holdings of stock could be lent.

8 Conclusion It is interesting to note that there has been slightly less newspaper print dedicated to short selling regulation in Asia versus Europe and the U.S., partly because the downward moves in Asian financials in 08 were less pronounced than in the U.S. and Europe. Part of this can be attributed to the relative healthier balance sheets of Asian financials in the sense that they were less active in the subprime mortgage loan market at the time.