Illegal trading investigated after stock market chaos

BEIJING - The Ministry of Public Security has joined hands with China's financial regulators to stabilize the stock market, vowing to crack down on illegal futures trading.

A team led by Vice Minister of Public Security Meng Qingfeng visited the head office of the China Securities Regulatory Commission (CSRC) on Thursday morning to investigate what it called "malicious short-selling of stocks and stock indices", an example of the dodgy practices many believe resulted in the rout in the Chinese stock market over the past few weeks.

Police and the stock regulator have also looked into more than 10 institutional and individual investors for alleged "malicious" shorting of blue-chip stocks, the China Securities Journal reported on Thursday.

Most of the country's stock index futures traded down by the daily limit of 10 percent earlier this week as the Shanghai and Shenzhen benchmark indices tumbled nearly 30 percent from their peaks in mid-June.

However, with additional funding provided by Chinese securities brokerages and regulators, the stock market ended its losing streak on Thursday. The bounce continued through Friday, as the Shanghai Composite Index closed up 4.54 percent while the benchmark in Shenzhen surged 4.59 percent. Around 1,400 listed firms, over half of all those traded in Shanghai and Shenzhen, are suspended from trading to prevent a further retreat in share prices, according to market intelligence agency Wind.

The Economic Crime Investigation Department under the Ministry of Public Security is responsible for combating illegal trading and financial crimes and has with financial regulators in the past.

In 2012, local police helped the CSRC root out illegal securities brokerage business by a Shenzhen-based company across many provinces.

In the latest case of cooperation to prevent China's stock market from tumbling further, the Ministry of Public Security urged local police "to work closely with regulators to ward off and crack down on illegal activities in financial futures in accordance with law".

The crackdown will focus on insider trading, fabricating and spreading fraudulent information about futures trading, and market manipulation. Police will also open a probe with the CSRC into the "malicious short-selling", though it didn't specify what constitutes malicious short-selling.

"The cooperation between police and stock regulators in cracking down on illegal activities will send out a strong deterrent to the market and hopefully this will assuage panic among investors," said Zhao Qingming, chief economist at the Institute for Financial Derivatives, the research arm of the China Financial Futures Exchange.

"Police and regulators should ensure nobody breaks the law in market trading and punish those who engage in illegal activities," said Xu Hongcai, an economist at China Center for International Economic Exchanges, a Beijing-based think-tank.

Regulators should find out whether illegal activities contributed to the sharp fall in China's stock market over the past two weeks, Xu added.

According to China's criminal law, market manipulators could face up to 10 years in prison and heavy fines.

Police are also targeting stock market rumormongers. Beijing police said on Sunday that they had detained a 29-year-old man for spreading rumors that a person had jumped off a highrise in Beijing's Financial Street after incurring heavy losses in the stock market. The picture and video posted online, the police said, were actually of a man falling off a building in east China's Jiangsu Province, and the cause is still unknown.

"The market correction should teach investors a lesson about the stock market," Xu said. "They should not make decisions based on hearsay and rumors."