China yanks the string on the stock exchange yo-yo by going after “illegal” sales

China yanks the string on the stock exchange yo-yo by going after “illegal” sales
Image: Reuters
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Selling shares on China’s super-volatile stock market isn’t just discouraged by the government: It might be illegal.

That’s the message behind regulators’ investigations into illegal and irregular stock-trading activity in the last two weeks—news that helped to drive the Shanghai Composite up 3.4%, after a stomach-churning decline the day before.

The state-run People’s Daily reported that between July 14 and 24, the stock market regulator opened 28 investigations (link in Chinese)—that’s more than it launched during the entire first half of the year. Regulators also revealed that they are investigating share-dumping transactions (link in Chinese) that took place on July 27, when the Shanghai Composite plummeted by nearly 8.5%.

The probes are intended to send a message to investors and companies that they should be buying stocks, not selling them. Something similar happened on July 9, the last time markets surged.

“From monitoring social media, psychologically, the deciding policy from retail investors’ perspective is [news that] police are checking on illegal short-selling activities,” David Cui, strategist at Bank of America/Merrill Lynch, said in a conference call at the time. “Many local investors think if the government is willing to go to such an extent to stop the rout, maybe it means it’s the bottom of the market.”

While the government’s long arm can send the stock market climbing, the actions of its very visible hand had the opposite effect earlier this week.

Speculation began swirling last Friday that Beijing was pulling back on its all-out bailout of the stock market, launched the weekend of July 4. This was possibly due to criticisms of its rescue package by the IMF, which will soon decide policy on the use of the Chinese yuan among central banks. When rumors Monday that the margin-trading clearinghouse had repaid some of its interbank loans early—thereby sucking liquidity from the margin-trading that’s been driving the market—investors bolted for the exits. This chart shows the shriveling-up of margin trading in the first two days of this week:

However, the state has been taking steps to assure investors that government cash isn’t going anywhere. In an interview posted on its site, the securities regulator declared that speculation about the “national team” withdrawing the government bailout was “totally false.” It also urged the community to report clues about ”malicious short-selling” via its special phone and email hotlines (overseas tipsters, don’t forget the +86 area code).