China Security Ministry to Probe ‘Malicious’ Short Selling

China’s police ministry is teaming up with the securities regulator to probe short selling, as the government works to stem a stock plunge that has erased $3.9 trillion in market value.

The Ministry of Public Security said it will help the China Securities Regulatory Commission investigate evidence of “malicious” short selling of stocks and indexes, according to a statement on its website Thursday. Vice Public Security Minister Meng Qingfeng visited the regulator’s offices in Beijing on Thursday, the official Xinhua News Agency said earlier on its microblog.

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, 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.”

The Security Ministry has started an investigation into more than 10 institutions and individuals over suspicion of “maliciously” shorting blue-chips on Wednesday, China Securities Journal reported on its website Thursday.

Determination

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 ($261 million) on Wednesday, or less than 0.01 percent 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 jumped 5.8 percent on Thursday, its biggest gain since 2009, as the government battled to restore investor confidence.

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.”

— With assistance by Ting Shi, Shidong Zhang, and Guo Aibing

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