After Market Rout, Chinese Authorities Go After Short Sellers

July 9, 2015 Updated: July 10, 2015

On the same day China’s shares rallied from a ten day free-fall to record the biggest daily gain in six years, the second most powerful man in China’s public security agency announced an investigation into “malicious short selling.”

The legally dubious term—short selling is legal, though limited, in China, and there is no legal definition of a “malicious” form of the activity—appears to the basis on which the Ministry of Public Security is looking for targets on which to blame the recent stock panic.

The joint investigation will also look into insider trading, disclosure of confidential corporate information, and the spreading of false information about securities and futures exchanges, said public security vice minister Meng Qingfeng, according to Chinese regime mouthpiece Xinhua News Agency.

Meng, who was promoted on July 2, led a team and visited the China Securities Regulatory Commission’s head office to prove how serious the regime is in combating practices that are either unlawful or flout regulations, Xinhua reported.

Over ten institutions and people are currently being investigated for engaging in “malicious short selling” of blue chip stocks, state-run publication Beijing News reported.

Short selling involves the trading of borrowed stock by a seller for profit, and can be highly risky in a market that is shooting upwards.

Blaming short sellers for the Chinese stock market collapse is an odd move by the Chinese regime—it’s difficult to actually short shares in China, and much of the market is stacked with inexperienced investors who simply try to get quickly in and out of positions with their money borrowed on margin.

“In China, short selling of individual A-share securities is heavily restricted and the borrowing costs are prohibitively high,” Tony Hsu, chief investment officer of Hong Kong-based hedge fund OTS Capital Management, told the Wall Street Journal.

If Meng and his colleagues do find evidence of short selling, it’s unclear what their legal basis would be to prosecute those investors.

In an interview with state-funded media China Business News, Huang Jianzhong, an associate professor at Shanghai Normal University, explained that short selling is a strategy of speculation, not a criminal offense.

Liu Junhai, a law professor at Renmin University, told China Business News that manipulating the markets, insider trading, and disclosing false information in the sale of securities all qualify as crimes. But “malicious short selling”? There’s no law against that.