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"We Want The Names Of Anyone Who Sold" - China's Market Witch Hunt Enters Twilight Zone

Having claimed 'foreign interests' were "waging an economic war" against China, it was ironic that the most outspoken of Chinese SOEs is now under investigation for 'selling' shares when it was told not to. As Reuters reports, China is extending its dragnet for "malicious sellers" to Hong Kong and Singapore as the witchhunt blame-mongery continues, Rather ominously, the China Securities Regulatory Commission (CSRC) has demanded trading records to try to identify those with net short positions who would profit in case of further falls in China-listed shares, three sources at Chinese brokerages and two at foreign financial institutions said. Even more incredibly, as Bloomberg reports, despite total ignorance by US regulators, China is 'daring' to crackdown on market manipulation via 'spoofing'.

China is pressing foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over stock trading records, sources told Reuters, extending its pursuit of "malicious" short sellers of Chinese stocks to overseas jurisdictions.

The markets regulator, the China Securities Regulatory Commission (CSRC), wants the trading records to try to identify those with net short positions who would profit in case of further falls in China-listed shares, three sources at Chinese brokerages and two at foreign financial institutions said.


At its regular press conference on Friday, the CSRC said it had not directly contacted top executives at Hong Kong brokerages. It also noted that it was normal, in the course of an investigation, to reach out to "relevant parties".


The regulator has declared war on "malicious short sellers" or those it deems are trying to profit from a fall in share prices, rather than adopt a short position as a financial hedge.


"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 CSRC has no regulatory power in Hong Kong or other jurisdictions, such as Singapore and the United States, where investment products tracking mainland shares are listed, and can be legally shorted.


But market sources worry that Chinese regulators are intent on suppressing any attempt to profit from China's sliding markets, including trying to suppress even legal investment behavior by referring to it as "malicious" or otherwise irregular.


At the same time, the government is trying to rally retail investors who dominate trading in China to put money back into the market, a task made more difficult if investors offshore are making bets on falling prices.

As we have detailed in depth previously, spoofers make money by feigning interest in buying or selling at a certain price, creating the illusion of demand in an attempt to make other traders move the market. The spoofer cancels the original order and buys or sells at the new price to make a profit. And so as Bloomberg reports, spoofing has become the latest target in China’s campaign against stock-market manipulation after a $3.5 trillion selloff.

“It certainly looks like spoofing is at play here,” said Bernard Aw, a strategist at IG Asia Pte Ltd. in Singapore. “Given that this practice is seen as market manipulation, it is not surprising to see CSRC stepping in.”


The practice, which involves placing then canceling orders to move prices, is suspected in 24 accounts on the Shanghai and Shenzhen stock exchanges, the China Securities Regulatory Commission said on its microblog. The bourses have restricted the accounts and regulators are investigating program traders, who have recently had an “obvious” impact on the stock market, the CSRC said.


China’s focus on spoofing follows a probe of “malicious” short selling, part of the government’s unprecedented effort to shore up investor confidence.


“The public isn’t happy about the market plunge so the regulator needs to take some actions as a response, and that’s part of the government’s plan to prop up the market,” said Zhang Haidong, the chief strategist at Jinkuang Investment Management in Shanghai. “Whether it’ll be effective remains to be seen.”

*  *  *

As one trader noted,

Spoofing "works on the way up and the way down, so it’s interesting it’s only a problem when it causes equity prices to fall."

And so, just as we have remarked previously, this kind of manipulation will be tolerated in the US markets until such time as stocks begin to tumble then it will be scapegoated as the sole reason why equity confidence collapsed.