By Chen Daofu & Li Ganlin, Research Institute of Finance, DRC

Research Report, No.396, 2021 (Total 6461) 2021-12-16

Abstract: Short selling is an important mechanism to improve the efficiency of price discovery in the stock market and an important means to realize the function of resource allocation in the capital market. The current price formation mechanism absorbs the price information with a certain “bias” and tends to make an overestimation. Short selling mechanism not only achieves the balance of investors with different information and views in the mechanism, broadens the viable portfolio boundary of the market, but also plays a positive role in encouraging the early detection of financial fraud, preventing foreign capital from manipulating the A-share market through overseas channels and urging founders to be diligent and responsible. Pilot practice has been made in short selling mechanism in China, but it cannot meet the market demand due to inadequate cognition and imperfect supporting measures. In view of the pilot practice made in the reform of the Sci-Tech Innovation Board, the foundation of the short selling system and the structure of investors, the trials of the short selling mechanism can be gradually phased in on the basis of removing the doubts held by short selling institutions in the stock market through relevant inquiries .

Keywords: short selling mechanism, price discovery, Sci-Tech Innovation Board