Starting today, overseas investors are being allowed to short sell over 400 different stocks listed in Shanghai through the Shanghai-Hong Kong Stock Connect.
The idea is to attract more sophisticated international investors into the mainland financial markets by offering them more hedging options.
However, the move has also created concern among some that a large volume of overseas capital flowing through Hong Kong could bring significant instability to the A-share market here on the mainland.
However, most market observers expect the initial impact of the short-selling scheme to be limited due to restrictions that have been put in place.
Zhou Huan is an analyst with China Asset Management.
"A series of restrictions are in-place to guarantee that there won't be too much speculation during the process, and most investors will mainly use the mechanism to secure their assets and avert risk."
Under the restrictions, the volume of short positions on any given stock will be capped at 1-percent per day, and at 5-percent per ten consecutive days.
Short selling of any stock will also be temporarily suspended if the volume of short positions exceeds 25-percent of the stock's total shares.
Such trading will only be resumed when that figure drops below 20-percent the following trading day.
The process of short-selling has the potential to add more volatility to the market, as both buyers and sellers tend to move stocks quickly in and out of their portfolios to capitalize on the rise and fall in a share's value.
