Hong Kong is not a cash machine: MPF money in the 2011 short-selling row

In October 2011, Hong Kong stocks shed more than 4,000 points in short order, wiping out half of many residents’ equity investments. On a radio talk show, callers vented their fury at the government’s refusal to ban short selling: MPF schemes held large amounts of Hong Kong shares — workers’ hard-earned money — yet trustees could lend those stocks to foreign funds for shorting. Hong Kong, one caller said, had become a cash machine for foreign predators.

Is it legal for MPF trustees to lend stocks to short sellers?

MPF securities lending means trustees lend scheme-held securities to market participants for lending interest. 2011 commentary questioned whether foreign banks, as MPF trustees, were lending workers’ stocks to overseas funds for short selling — turning Hongkongers’ retirement money into big players’ funding — and demanded scrutiny of possible fiduciary breaches.

The financial services secretary at the time said he saw no systemic risk and described Hong Kong’s short-selling regime as the strictest in the world, implying little need for intervention. Callers were unconvinced: the US, European countries and South Korea are all free economies, yet each banned short selling in financial stocks — why couldn’t Hong Kong?

The “empty-glove” trade: HK$250,000 of margin doing the work of a million

The commentary cited market insiders saying foreign banks could short with roughly 10% borrowing interest and 25% margin — and, crucially, no deadline for buying back the borrowed shares. The loophole was enormous: HK$250,000 in margin could be turned into HK$1 million in cash from the short sale, then redeployed at lower prices again and again, so one pot of money did the work of five or six, driving the market ever lower. The banks could then “slaughter the bulls”, killing off masses of bull certificates while investors lost everything and the banks pocketed outsized profits several times over. With daily warrant turnover running into tens of billions of Hong Kong dollars, letting the predators run free struck the commentator as humiliating.

The demand: transparency and a repayment deadline

Even without an outright ban, the commentary argued, the authorities should at minimum enforce transparency: disclose who lends stocks, who shorts them, and the cumulative short position in each stock — and set a deadline by which short sellers must return borrowed shares, just as every index futures contract specifies a settlement date. Stock shorting, it said, should not operate with no limits and no transparency.

The piece singled out HSBC, which administered the largest share of MPF assets — and hence managed the most Hong Kong shares on members’ behalf — warning that lending MPF stocks to predators for shorting would be a breach of trust. It urged lawmakers to question Financial Services Bureau officials and put limits on short selling to protect Hong Kong investors and MPF members.