Could GameStop-style short sales speculation appear on the Chinese stock market?
Last week’s market frenzy in the U.S. may have inspired China’s crypto community to place more bets on dogecoin (DOGE) and bitcoin (BTC), but even the most daring traders should not try to stir up this type of sales speculation. short in Chinese stocks.
“Chinese financial regulators are closely monitoring who is trading what in the Chinese stock market. Retail investors involved in large-scale malicious short selling can be put in prison, ”said Jason Wu, CEO of cryptocurrency company DeFiner.
“The market capitalization of the crypto market in China is extremely small compared to the Chinese stock market, so all eyes of the authorities are on the stock market deregulators,” added Wu.
The China Security Regulatory Commission (CSRC), the country’s top financial oversight body, has been closely monitoring short selling activities since a major crash in 2015.
On the Shanghai Stock Exchange, a third of the value of A shares, which are shares in public companies based in mainland China, was wiped out within a month, and more than half of the listed companies filed for suspension of business to avoid further losses. .
While the cause of the historic downturn remains unclear, some of the most prominent economists blamed short sellers for the crisis. Short sellers bet that the price of the shares they sell will fall.
“It is margin trading and short selling that killed the bull market before the [2015] falling market, ”said Shuwei Liu, a researcher at the Institute of Financial Research at the Central University of Finance and Economics, in an article of July 7, 2015, entitled“ Chinese short sellers must be severely punished ”.
“A shares are still an emerging market. The CSRC does not have the ability to put leverage tools under control, ”Liu wrote then. “Under these conditions, we are giving short sellers of illegal A shares a weapon, opening the short sale.” The CSRC allowed the margin trading and short selling system in March 2010.
The central bank accused foreign financial institutions of market manipulation by short selling large quantities of Chinese shares, implying that American investment bank Morgan Stanley caused some of the problems in the Chinese stock market.
“While Chinese retail investors can technically sell short on a small scale, there is no way for financial regulators to allow something like the GameStop short tightening to happen on the Chinese stock market,” said DeFiner’s Wu.
It would be a logistical challenge for Chinese retail investors to organize a GameStop campaign. A key player in GameStop’s history is the social media platform Reddit, where anonymous users can meet and discuss short selling strategies in undervalued stocks.
Most of the 177 million Chinese retail investors, who hold 28.6% of the total value of the Chinese stock market, communicate with each other in groups on domestic social media platforms like WeChat, QQ or Weibo, where moderators can censor “Illegal content” on platforms.
“Unlike many tech-savvy crypto traders, many retail stock investors don’t have VPN or any other access to encrypted messaging apps, like Telegram or Signal,” said Wu. “I can’t imagine that a large group of people could talk about short selling in a public forum like Zhihu,” the Chinese response to Reddit.