When all else fails blame the “malicious” short sellers.
In order to find the culprits behind the 30% crash in the Chinese stock market this summer, Chinese authorities are pursuing short traders in overseas jurisdictions. Traders who sell short would profit if China-listed shares fall further.
The authorities have told foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over stock trading records, unnamed sources told Reuters.
The China Securities Regulatory Commission (CSRC), which regulates China’s markets, wants the trading records to identify traders with net short positions, three sources at Chinese brokerages and two at foreign financial institutions told Reuters.
The CSRC said at a press conference Friday that it had not directly contacted top executives at Hong Kong brokerages, although it would be normal to speak with relevant parties during an investigation. The regulator also denied media reports that it demanded that the heads of Chinese brokerages attend meetings in Beijing or Guangzhou.
The regulator has said short position should only be used as a financial hedge and has declared war on “malicious short sellers”, or those it deems are trying to profit from declining share prices, said Reuters.
“The implied threat by the CSRC is that anything that is not a hedge is a no-no,” a Hong Kong source told the news agency. This person added that foreign brokers were likely to comply as best they could with the requests. “When the CSRC makes an offer, you cannot refuse it.”
Reuters added that all the sources have direct knowledge of the matter, but declined to be identified because of the sensitivity of the matter. The sources at mainland brokerages with Hong Kong operations said their firms had already turned over the records. The CSRC didn’t respond to requests for comment by Reuters.
Over the past month, the government has taken many steps to stabilize the falling stock market. Reaching into all corners of the nation’s financial-services industry, the authorities have demanded action from the central bank, the state margin-lender, commercial banks, brokers, fund managers, insurers and pension funds to keep the markets afloat. Typically, they have done that by buying shares.
However, the CSRC has no regulatory power in Hong Kong or jurisdictions outside the mainland. And in most of those places, investment products tracking mainland shares can be legally shorted.
All governments try to control stock markets to some extent. In the US it’s called quantitative easing. But typically, governments don’t have much power, except to indirectly nudge people in a certain direction.
However, we think the malicious shorts aren’t the real problem, but symptomatic of a larger problem. And that is that the authorities have a lot to learn about markets and the way they work.
Short sellers are necessary. They are essential for price discovery in a healthy market. They are also very good at discovering companies with fraudulent practices.
The second thing is that unlike your own citizens, you can’t control investors in foreign jurisdictions. And if they are doing something you don’t like, but it’s legal, you don’t have many options besides shutting your markets to foreign investors again.
Finally, considering foreign investors have only been able to buy or sell since November, they don’t have the power to move the market. They’re just along for the ride.
So, this is really just a PR ploy by the government to blame foreigners. And Asia Unhedged can’t say it’s a bad strategy. It seems to be working for Donald Trump’s presidential campaign.
However, the government would do better to focus on the heads of Chinese brokerages and corporations who are not in the mood to hold the falling shares of their own companies.