Could GameStop-style short-selling speculation show up in China’s stock market?
Last week’s market frenzy in the U.S. may have inspired China’s crypto community to make more bets ondogecoin (DOGE) and bitcoin (BTC), but even the boldest traders are unlikely to try stirring up that kind of short-selling speculation in Chinese stocks.
“The Chinese financial regulators are closely monitoring who are trading what in the Chinese stock market. Retail investors involved in large-scale malicious shorting could be put in jail,” said Jason Wu, CEO of crypto-learning firm DeFiner.
“The market cap of the crypto market in China is extremely small compared to the Chinese stock market, so all the authorities’ eyes are on the disruptors of the stock market,” Wu added.
The China Security Regulatory Commission (CSRC), the top financial watchdog in the country, has been closely monitoring short-selling activities since a massive crash in 2015.
On the Shanghai exchange, one-third of the value of A shares, which are stock shares of mainland China-based public companies, was wiped out within a month back then, and more than half of the listed companies filed for a trading halt to prevent further losses.
While the cause of the historic drop remains unclear, some of the most prominent economists blamed short-sellers for the crisis. Short sellers bet a stock they sell will drop in price.
“It is the margin trading and short-selling that killed the bull market before the [2015] market crash,” Shuwei Liu, researcher at the Finance Research Institute of Central University of Finance and Economics, said in a July 7, 2015, op-ed titled, “Chinese Stock Short Shellers Should Be Heavily Punished.”
“The A shares are still an emerging market. The CSRC does not have the ability to get the leverage tools under control,” Liu wrote then. “Under these conditions, we are giving the illegal A shares short-sellers a weapon by opening up short-selling.” The CSRC allowed the margin trading and short-selling system in March 2010.
The central bank accused foreign financial institutions of market manipulation by shorting large quantities of Chinese stocks, implying the U.S investment bank Morgan Stanley caused some of the troubles in the Chinese stock market.
“While Chinese retail investors could technically carry out shorting stocks on a small scale, there is no way the financial regulators would let anything like the GameStop short squeeze happen to the Chinese stock market,” DeFiner’s Wu said.
It would be logistically challenging for Chinese retail investors to organize a GameStop campaign. A key player in the GameStop story is the social media platform Reddit, where anonymous users can meet and discuss shorting strategies on undervalued stocks.
The majority of 177 million Chinese retail investors, who hold 28.6% of the total Chinese stock market value, communicate with each other in groups on domestic social media platforms like WeChat, QQ or Weibo, where moderators can censor “illegal content” on the platforms.
“Unlike many tech-savvy crypto traders, many retail stock investors do not have VPN or any other kind of access to encrypted messaging apps such as Telegram or Signal,” Wu said. “I can’t imagine a large group of people would be allowed to talk about shorting stocks on a public forum such as Zhihu,” the Chinese answer to Reddit.