As Beijing moves to protect stocks, some trades once encouraged are now a crime

China’s measures to save the stock market have moved from a simple but desperate attempt to stem losses to becoming outright dangerous for market participants.

In recent weeks the government and market regulators have rolled out a series of measures to support stocks amidst a savage correction. The frequency that these measures were being rolled out accelerated in recent days – and it coincided with accelerated losses for stocks.

From an outside observer the actions appear to be increasingly desperate. Since China’s central bank, the PBOC, cut interest rates in late June – widely seen as an action to support the stock market rather than the broader economy – the backstops to address the market slide have moved from the unusual to the outright bizarre.

Now they’ve reverted to augmenting market rules, in some instances seemingly on a whim, in order to support the market.

One measure announced today was particularly bizarre.

According to China’s state-owned newswire Xinhua Chinese police and securities regulators launched a joint probe earlier today into what they believed to be “malicious” short selling of shares. According to Xinhua the investigation shows that authorities will “punch back” against illegal activities with a “big fist”. The investigative team, led by Vice minister of public security Meng Qifeng according to unnamed sources, arrived at the China Securities Regulatory Commission, China’s stock market regulator, early Thursday morning.

In essence, without explaining which rules were broken or who had broken them, arrests, it seems, may be made against those who have short-sold stock.

Short-selling is the process where an investor sells a borrowed stock in order to purchase it back at a lower level for a profit.

It’s difficult to comment on the apparently illegal short-selling activities the “team” is investigating. We simply don’t know what rules have been apparently broken. But it certainly is a marked turn of events to what regulators were pushing only a few months ago.

As the stock market rally saw mainland stock indices rise more than 100% in just six months, regulators were actively encouraging Chinese fund managers to lend shares to those investors who were looking to short the market, according to a report from Bloomberg.

Now, seemingly, when the market is not behaving the way it would like, the use of short selling is being increasingly blamed for market losses.

It’s not the increased use of margin lending to buy stocks using leverage against an increasingly poor fundamental backdrop. No, it’s the short sellers fault that the stock market is on the ropes.


Looking through the China Securities Regulatory Commission’s website earlier today one thing jumped out. In the website banner the CSRC outlines three statements by which it seemingly stands for:

  • To maintain a transparent, fair and equitable market;
  • to strengthen the protection of investors, small investors in particular; and,
  • to facilitate in the sound development of China’s capital market.

They are some interesting in light of recent actions taken by the regulator.

Does chopping and changing market rules on a whim “promote in the sound development of China’s capital market” or “strengthen the protection of investors”?. Does it maintain a “fair a transparent, fair and equitable market”?

Based on the regulator’s recent actions the answer is, plainly, no. A lot of people are talking right now about China learning hard lessons about capitalism and the potential longer-term consequences for reform. But there’s a more immediate message in rounding up and potentially arresting people for ordinary market behaviour that was being encouraged just months ago: being on the wrong side of the market in China is, potentially, a crime.

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