China security agency to probe 'malicious' short selling of stocks

A stock investor reacts as he checks prices in a brokerage house in Fuyang in central China's Anhui province on July 8, 2015.
A stock investor reacts as he checks prices in a brokerage house in Fuyang in central China's Anhui province on July 8, 2015. PHOTO: EPA

HONG KONG (Bloomberg) - China's domestic security agency is teaming with the securities regulator to probe short selling, as the government works to stem a stock plunge that has erased US$3.9 trillion (S$5.27 trillion) in market value, the state news agency said.

The Public Security Ministry will help the China Securities Regulatory Commission investigate evidence of "malicious" short selling of stocks and indexes, the official Xinhua News Agency said on its microblog. Vice Public Security Minister Meng Qingfeng visited the regulator's offices in Beijing on Thursday.

The move comes after the securities regulator pledged to "strictly" punish market manipulation and China's state-run media blamed short selling, rumor-mongering and foreign meddling for fueling the stock slide. The ruling Communist Party has announced an unprecedented series of measures to boost shares to little effect, including banning major shareholders, executives and directors from selling stakes.

"If you sell huge amounts of stock on the spot market and sell lots of futures contracts, then you'll probably be a 'malicious short seller,'" said Jiang Lin, an analyst at Xinhu Futures Co. in Shanghai. "They will probably investigate a few accounts with big amounts of money and catch some as typical examples."

Short selling, in which people sell borrowed stock at lower prices to bet on its decline, represent a relatively small portion of China's trades. Short positions on the Shanghai Stock Exchange totaled just 1.62 billion yuan (S$352.6 million) on Wednesday, or less than 0.01 per cent of the country's market capitalization, as bears closed out more than half their bets since June 12.

Investors can also bet on market declines by trading equity-index futures.

The benchmark Shanghai Composite Index rose as much as 2.6 per cent to 3,598.96 on Thursday, its highest level since Monday. The gauge was up 1.3 per cent as of 11:49 a.m.

The security ministry's move to investigate short-selling demonstrates the authorities' determination to treat illegal market activities in a "heavy-handed manner," Xinhua said.

"The government feels compelled to send a clear message that on the one hand they are supporting the market and, on the other hand, they're cracking down on any activities that could destabilize the market," said Zhao Xijun, deputy dean at Renmin University's school of finance and a former consultant to the securities regulator.

"The regulators can catch some suspects, but for those behaviors that amount to financial crimes and go beyond the scope of regulators, the public security agency needs to step in."