China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks

In China, a massive witch hunt is underway.

Beijing regulators now seek individuals who  have destabilized the markets and spread rumors.

Official want someone to blame after their Large-Scale Share Purchases failed to halt a huge stock market slide.

China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials.

For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200bn trying to prop up a market that is still down 37 per cent since its mid-June peak.

After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5 per cent. The market rose by almost 5 per cent again on Friday.

Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities.

Instead, authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government’s attempts to shore up the market.

The regulator said 22 cases of insider trading, market manipulation and “spreading market rumours” had been handed over to the police.

Last Tuesday, following a 22 per cent fall in China’s stock market over four trading days — the worst drop for almost 20 years — police detained 11 people suspected of “illegal market activities”.

Inane Policies

If China wants to find the culprits behind the selloff, its leaders ought to look in a mirror.

Totally inane growth targets, worthless or near-worthless SOEs, and currency manipulation by China's central bank are obvious problems that helped create a huge property bubble followed by a huge stock market bubble.

Instead of blaming their own bubble-blowing incompetence, Chinese regulators seek scapegoats.

Eight managers from Citic Securities, one of China’s largest investment banks, two officials from the China Securities Regulatory Commission, and a journalist from the financial magazine Caijing are among those already detained for "illegal activities" in the early stages of this witch hunt.

When the selloff resumes, the intensity of the witch hunt will pick up, and so will the intensity of capital flight.

Mike "Mish" Shedlock