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Shares climb substantially as short selling is investigated

Li Xiang and Zhang Yan
Updated: Jul 10,2015 7:23 AM

Investors check stock information at a brokerage office in Xi’an, capital of Northwest China’s Shaanxi province, July 9, 2015. [Photo/Xinhua]

The plunging equities market showed sign of stabilizing on July 9 as a series of government initiatives designed to halt the panic sell-off starting last week appeared to be having an effect.

The Ministry of Public Security said on July 9 it is planning a nationwide campaign to crack down on illegal operations in the field of securities and futures to protect the order of capital markets and investors’ interests.

A statement from the ministry said it is judging and analyzing the “abnormal volatility” of the stock market with the China Securities Regulatory Commission (CSRC).

It said police should closely cooperate with regulators in handling cases involving insider trading and leaking inside information.

Those who fabricate and disseminate false information on trading securities and futures as well as those who manipulate markets will also be probed and punished, according to the statement.

The ministry asked police to carry out a swift investigation into evidence related to “malicious short selling” and deal with them according to law.

On the morning of July 9, Vice-Minister of Public Security Meng Qingfeng led a team and visited the head office of the CSRC, a sign that authorities will severely punish operations that violate laws and regulations.

Short selling involves selling an asset the trader does not own in anticipation of a fall in its price and buying it back to make a profit.

The move is the government’s latest effort to restore investors’ confidence after a 30 percent market decline, and it underlines Beijing’s determination to do “whatever it takes” to contain the stock turmoil that has erased $3.9 trillion of market value.

On July 9, the stock market rebounded strongly, with the benchmark Shanghai Composite Index surging by 5.76 percent, or 202.14 points, to close at 3,709.33.

Nearly 1,300 stocks jumped to the 10 percent trading limit, while trading in more than half of the stocks remained suspended.

“The rally was a response to the strong government action to rescue the market that has clearly reached the State level,” said Li Xunlei, chief economist at Haitong Securities.

Li said that the bottom of the market is being gradually built, but investors should be cautious of short-term volatility.

Beijing has waged a concerted campaign involving a number of government agencies to shore up the stock market as it suffered an unprecedented loss of more than 1,500 points in record time, after peaking at more than 5,000 points on June 12.

On July 9, the banking regulator allowed lenders to roll over loans backed by stocks to securities brokerages. The securities regulator has banned major stockholders and senior executives from selling shares in listed companies.

The People’s Bank of China has continued to inject liquidity of 35 billion yuan ($5.66 billion) to State-owned margin lender China Securities Finance to boost the capital position of securities firms.

Alain Bokobza, head of global asset allocation at French bank Societe Generale, said the central bank has room to aggressively loosen monetary policy to lift both the economy and the stock market, since inflation is well under control and the country can afford such a massive liquidity injection.

Despite the market turbulence, listed companies remain optimistic about the long-term development of the Chinese capital market, an increasingly important channel for fundraising and asset allocation.

“The recent market decline has not changed any of our plans to continue to use the stock market to support our business development,” said Wang Zhengzhuang, a senior executive of Shenzhen-listed Qingdao Hanhe Cable.

An encouraging sign for investors is the improved corporate performance in the first half of the year. More than 1,100 listed companies have released previews of their half-year performance reports, with more than half of them reporting net profit growth.