The Shenzhen Special Zone Daily recently reported that regulatory authorities warned some qualified foreign institutional investors (QFII) against short selling in the domestic stock market.

It seems odd that QFIIs which were introduced last year to help bring the Chinese capital markets up to international standards served as trouble-makers in the eyes of the securities watchdog.

However, such reporting seemingly gained much credibility from resounding talks that a huge amount of hot money is cruising at China's door in expectation of a potential revaluation of local currency.

As international speculators are eager to find their way into China, chances are that they might deem those foreign brokers in the domestic markets ideal vehicles.

If so, the Chinese securities authorities should remind QFIIs of their obligation to strictly abide by the country's laws and regulations.

But simply warning against short selling is neither enough nor far-seeing.

On the one hand, given their rich experience of various financial derivatives in developed countries, QFIIs must have more expertise than just short selling from which they can profit.

To standardize these foreign brokers' operations and encourage them to play an exemplary role for domestic counterparts is, in itself, a hard test of the securities watchdog's capability of administering an increasingly complex domestic capital market.

On the other hand, though China still does not officially allow short selling, the country is pressing ahead with financial innovation to boost development of the domestic capital market.

To enrich the diversity of fund products, the nation's first exchange-trade fund (ETF) will debut next Monday. The ETF is a listed open-ended index fund based on the Shanghai Stock Exchange 50 Index, which tracks the 50 most liquid blue-chip stocks in China.

Early next month institutional investors will be able to engage in outright treasure bond repurchase. Such business allows the original holder to purchase at strike price after a certain period from the buyer the treasure bond it has sold to. That, in practice, means institutional investors can sell short in the bond market.

Admittedly, short sale may add to fluctuation in premature capital markets.

But a short selling mechanism is crucial to risk-hedging and efficiency-improving in the capital market.

As the mechanism is being adopted in bond trading, the domestic stock market should step up infrastructural construction to accommodate it rather than indiscriminately refuse it.

(China Daily November 26, 2004)