Much like O.J. Simpson’s quixotic quest across the best golf courses in America to find the real killers of his wife and her friend, Ron Goldman, the Chinese government has upped the ante in its effort to stop those it considers the true villains of this summer’s equity market crash: the “malicious short sellers.”
The government told the two mainland stock exchanges that they needed to impose a ban on same-day margin lending for short selling. The websites of both the Shanghai and Shenzen exchanges announced late Monday that they were instituting a new rule to prohibit investors from borrowing and repaying stocks within the same trading day
Immediately afterward, several of the country’s leading brokerages, including Citic Securities, that they would temporarily suspend short selling to comply with the rule changes and to control risks, reported the South China Morning Post.
Short selling is when a trader sells a stock first, with the expectation of buying it back at a lower price some time in the future.
“They want to impose more stringent rules to make it harder for people to borrow money in an attempt to short sell stocks,” Louis Tse, director of VC Brokerage told the South China Morning Post.
Much like Simpson’s search for killers that didn’t exist, this latest move by Beijing is another way to distract attention from its ham-fisted attempts to stabilize the market over the past two months, and make people believe that “malicious short selling” contributed to the market turmoil. In addition, the China Securities Regulatory Commission says it’s targeting “automated trading” and “certain inter-market arbitrage trade” in its ongoing investigation into market manipulation, said the Morning Post.
Tse told the Morning Post that the latest tightening move was linked to a probe by Beijing into automated trading, as regulators suspect some investors may have practiced high-frequency trading and distorted prices in the process. A total of 38 accounts have been frozen by Chinese securities regulators since last Friday due to “irregular trading,” “hedging” or automated trading that allegedly caused market volatility.
And in case you thought there was some validity to this claim, Markit, a financial data firm, last week released a report that gives that a resounding, “No!” Markit surveyed foreign researchers who said the short selling of shares was not to blame for China’s stock market troubles. The report used official data to show there was minimal short selling in individual mainland-listed shares. In addition, the short selling of domestic exchange traded funds (ETFs) stood at only 1.2% of total domestic ETF assets under management,
“Chinese market regulators have turned to a familiar protagonist in order to explain the recent rout in [the] domestic market; short sellers. But securities lending data shows that this accusation is by and large overblown,” said Markit analyst Relte Stephen Schutte.
The jury’s out on whether the government’s fly swatter is intimidating. But Chinese stocks are doing better. The Shanghai Composite Index jumped 3.69% Tuesday. Hong Kong’s Hang Seng edged down 0.02%.