Short-selling is not currently permitted on the mainland Chinese stock exchanges,but is allowed in most other major stock markets. We review the theory and evidenceon liquidity, price discovery and market efficiency associated with securities lendingand short-selling. The evidence highlights a number of benefits and also risksassociated with these practices. We describe the approaches taken by the Hong Kongand Taiwan stock exchanges to develop short-selling and build on this to generateideas for the development of securities lending and short-selling in mainland China.We argue that a phased program of reform, well-implemented, can help buildconfidence in the mainland Chinese equity markets, by aiding price discovery andimproving market liquidity. This work will be of interest to policy makers, regulatorsand investors in the Chinese equity markets.