No short-selling ban: why Hong Kong fell harder than Europe and the US in October 2011

In early October 2011, Hong Kong stocks swung violently in the shadow of the European debt crisis, plunging within a week alongside European and US markets. One commentator asked an uncomfortable question: with several Western countries banning short selling at the most sensitive moment, why did Hong Kong’s losses run so much deeper?

Why did Hong Kong stocks fall further than European and US markets in 2011?

During the 2011 debt crisis, Greece, South Korea and Western countries banned short selling at the most turbulent moment — yet Hong Kong’s Financial Services Bureau said that October it would not follow, to protect investor confidence. The commentary argued this “undefended” stance drew speculators to Hong Kong while other markets barred short sellers, amplifying the Hang Seng’s fall.

Can MPF-held stocks be lent out for short selling?

MPF securities lending means stocks held by MPF funds are lent to big market players for short selling in exchange for lending interest. The 2011 commentary claimed that stocks bought with members’ monthly MPF contributions could indeed be lent to major players to short Hong Kong equities — and that the lending interest earned went to the fund management companies, not to MPF members.

The piece also raised the issue of information asymmetry: how much cash foreign fund managers running MPF money hold, what positions they carry, and when they plan to buy or sell are all extremely valuable market intelligence. While a fund manager who profits from front-running trades breaks the law, the law can hardly police everyone with access to a manager’s information, nor a manager’s every social contact.

The commentator’s call: a short-selling ban mechanism

The commentary urged the government to legislate a short-selling ban mechanism — not to encourage routine market intervention, but to keep anyone trading on privileged information in constant fear of a government squeeze on short positions, thereby protecting ordinary investors. In the commentator’s view, officials were academically accomplished but knew little about how investment markets work or about moral hazard, leaving Hong Kong poorly prepared for financial turbulence — and that, it argued, was why local stocks fell harder than their Western peers.