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 China's main share markets, both among the world's five biggest,
have slumped around 30 percent since mid-June and authorities have
been flailing in efforts to prevent a further sell-off that could
spill over into the wider economy.
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".
It denied other unnamed media reports that regulators had required
Chinese brokerage heads to attend meetings in Beijing or Guangzhou.
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 sources all have direct knowledge of the matter, but declined to
be identified because of the sensitivity of the matter.
HIGHLY UNUSUAL
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 and both the
Monetary Authority of Singapore (MAS) and Hong Kong's Securities and
Futures Commission (SFC) declined to comment.
The sources said the CSRC was focusing on trading 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 (ETFs).
"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.
One source at a mainland brokerage in Hong Kong said they had
received enquiries over the phone directly from the CSRC seeking
evidence of "naked shorting" - when an investor tries to profit from
falling prices of a given stock without actually owning the shares
necessary to complete the transaction, a practice that is restricted
in most markets.
"We immediately said we have no clients doing 'naked shorting,' but
they didn't believe us. They asked for our records on trades through
the Shanghai-Hong Kong Stock Connect and records of short-selling
index futures via QFII and RQFII."
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The Qualified Foreign Institutional Investor (QFII) program and its
yuan-denominated variant (RQFII), allow foreign institutions to buy
Chinese shares and trade index futures with some restrictions,
including how much can be invested.
Sources at mainland brokerages with Hong Kong operations said their
firms had already turned over the records.
MISGUIDED CAMPAIGN
The CSRC's campaign is the latest measure to try to stem the market
rout. 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.
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.
Foreign investors are technically allowed to take a short position
in a select group of A-shares - yuan-denominated shares listed in
China - through the Shanghai-Hong Kong connect scheme, a trading
link set up last year to open up Shanghai's market to overseas
investors. But exchange data shows there has been no investor
take-up of the shorting opportunity.
Investors can take bets that prices in mainland shares will fall
through offshore listed products, such as the popular iShares FTSE
A50, the Singapore-listed FTSE China A50 index futures, and
over-the-counter derivatives.
Trading in Singapore FTSE A50 futures surged 79 percent to a record
in April-June.
($1=6.21 yuan)
(Additional reporting by the Hong Kong, Shanghai and Singapore
newsrooms; Editing by Neil Fullick)
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