HONG KONG/SHANGHAI • China is asking foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over stock trading records, sources said, as stocks recorded their worst monthly drop in two years.
Three sources at Chinese brokerages and two at foreign financial institutions told Reuters that the China Securities Regulatory Commission (CSRC) had sought to identify traders and investors who had taken net short positions, or bets that prices would fall, against China-listed shares.
"The implied threat by the CSRC is that anything that is not a hedge is a no-no," said a source in Hong Kong with knowledge of the requests. 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."
The watchdog is also investigating the impact of automated trading on share markets as the authorities step up a crackdown on what they regard as heavy speculative selling that could destabilise the world's second-largest economy.
Its main share markets, both among the world's five biggest exchanges, have lost around 30 per cent of their value since mid-June, but the authorities have been flailing in efforts over the past three weeks to prevent a further sell-off.
There have been a number of questions over the past two weeks. They are going after any type of trading activity that has a reference to China.
AN EXECUTIVE at an international brokerage based in Hong Kong with direct knowledge of the CSRC requests
China's stocks fell yesterday, with the benchmark index heading for its worst monthly drop in almost six years, as the government struggles to rekindle investor interest amid a US$3.5 trillion (S$4.8 trillion) rout. The Shanghai Composite Index slid 1 per cent to 3,669.45 at the break, dragged down by energy and industrial companies.
The gauge tumbled 14 per cent last month as margin traders cashed out and new equity-account openings tumbled amid concern valuations are unsustainable.
Fearing the turmoil could spill over into the wider economy, the ruling Communist Party has enlisted the central bank, the state margin-lender, commercial banks, brokers, fund managers, insurers and pension funds to buy up shares, or help fund their purchase, to keep the Shanghai and Shenzhen markets afloat.
It is common for regulators to request information from their overseas counterparts that may aid investigations at home, but it is highly unusual for the CSRC to seek information from offshore and international brokers directly, one source in Hong Kong said.
The CSRC did not answer calls requesting comment, but in an apparent reference to the Reuters report, the regulator said yesterday it had not directly contacted top executives of mainland-based financial institutions in Hong Kong, although it was normal to reach out to "relevant parties" during an investigation.
The Monetary Authority of Singapore and the Hong Kong Securities and Futures Commission declined to comment.
The sources said the CSRC was focusing on positions taken through both the Shanghai-Hong Kong Stock Connect trading link and via offshore-listed products that track mainland stocks, including index futures and exchange-traded funds.
"There have been a number of questions over the past two weeks. They are going after any type of trading activity that has a reference to China," said an executive at an international brokerage based in Hong Kong with direct knowledge of the CSRC requests.
One source at a mainland brokerage in Hong Kong said that they had received enquiries over the phone directly from the CSRC seeking evidence of "naked shorting".
This is an illegal practice in most markets and describes when an investor tries to profit from falling prices of a given stock without actually owning the shares necessary to complete the transaction.
Amid the market turmoil, some foreign investors see an opportunity to buy, believing confidence will eventually return and private Chinese investors will come back to the market. "At some point, the magnitude of the Chinese market has to reflect its industrial might," said Mr Yu-Min Wang, chief investment officer at Nikko Asset Management.