| HONG KONG/SHANGHAI
HONG KONG/SHANGHAI China is pressing foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over stock trading records, sources said, extending its pursuit of "malicious" short sellers of Chinese stocks to overseas jurisdictions.
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.
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."
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.
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.
(Additional reporting by the Hong Kong, Shanghai and Singapore newsrooms; Editing by Neil Fullick)