It's true that every transaction always has two sides, the buyer and the seller. However, if you disallow short selling, you are effectively reducing the number of people who can sell, while maintaining the number of people who can buy. This shifts the equilibrium in the demand/supply curve in favor of the rising prices. By no means am I advocating such an intervention in any free market, just explaining the effect of it.
But isn't the number of people who can sell always limited by the number of people that can buy? If you can't find a buyer, there is no way that a seller who owns something can sell it, or someone who has nothing to sell and is looking to short it. I just can't get my head around how its different. With stocks, there have to be shares available to short, and there are only so many that are made available from what I understand. If a stock isn't looking too hot, I imagine there would be no more available to short as no brokerages have any more to loan out. But with futures, this isn't a problem... you just need a buyer, and it shouldn't matter if the seller is already in the market by holding a contract or looking to enter the market by being negative on a contract. When markets crash, its because there isn't a buyer at any price, not because there are so many short sellers because you couldn't have short selling without having just as many buyers stepping up to the plate. What am I missing?
No, there is no such thing as "can't find a buyer". There are always buyers ... at lower prices. The same goes for the sellers ... at higher prices. Unless, of course, you eliminate the sellers by disallowing short selling. That's not quite right. In order for markets to "crash", both sides of the market (i.e. buyers and sellers) must agree that the value shifted down. If only one side thinks so, this would simply result in a larger bid/ask spread and higher volatility.
If you recall, the US banned short selling of financial securities during the financial crisis and then the stocks really tanked. So it probably hurt, rather than helped.
As I noted earlier, in no way am I advocating the ban on short selling. Any intervention in a free market distorts the fair and true valuation. In the case that you are referring to, the market simply called the government bluff. The traders who had the stock dumped the stock in large quantities. The falling of prices in response to ban on short selling seems like the violation of the demand/supply principles, but it really is not. It was simply a way for the market to find a fair value in the constrained environment.
I would think it's just not a good sign.... In theory the circuit breaker in our US markets that was brought into effect the other day was similar a ban on selling... I doubt you'll ever see them use that circuit breaker when markets are rising to fast haha
My point is that the "man" tried to manipulate prices and in the end it didn't work and backfired. This is a common theme with financial interventions - they just delay the inevitable. People trying to prop markets up need to read a little history before they go down that path.
In my opinion, the control of China's stock index futures is just current and won't last for too long. The main reason behind this policy is that CFFE don't wanna be blamed for recent stock crisis. Imaging the stock market still suffers after index future trading is kind of closed, then no one can blame them any more.