A Study On The Introduction And Improvement Of "Muddy Water" Shorting Mechanism In China

As an important part of market economy system,the securities market is of great significance in financing enterprises and sharing the dividends of the development of the enterprise era for investors.After 30 years of development,the securities market of PRC has taken shape,and in 2016,the State Council officially authorized the implementation of the registration system for securities issuance,replacing the previous approval system for securities issuance,which is conducive to changing the phenomenon of investors’ over-reliance on regulators,so as to give full play to the role of market mechanisms and create a sense of "Buyer’s own risk".With the intensification of competition between China and the U.S.,a large wave of Chinese companies listed in the U.S.have faced shorting by shorting agencies in the U.S.and suffered huge losses.While reflecting on the problems of information disclosure and cross-border regulation of Chinese and U.S.securities,we should also note the importance of the "Muddy Waters" shorting mechanism for the supervision of listed companies and the quality of information disclosure of listed companies arising from the lack of such a mechanism in China’s securities market.The financing and financing system launched in 2010 is regarded as the beginning of the shorting mechanism in China,but there is no shorting institution similar to "Muddy Waters" in China’s market,and the market still lacks a strong external supervisor,leading to the frequent occurrence of financial fraud of listed companies,such as the Kang mei case,which has a huge impact on investors’ rights.China has amended the Securities Law in 2019 to formally establish a Chinese style representative litigation mechanism,which facilitates investors to defend their rights,but this is only a remedy after the discovery of misrepresentation of listed companies,and China still lacks a market-based mechanism for discovering financial fraud of listed companies.Therefore,this paper hopes to take the "Muddy Waters" shorting agency in the United States as a reference,and discuss the ways to establish and supervise the "Muddy Waters" shorting mechanism in China,taking into account the actual situation in China and the overseas regulatory experience on such shorting mechanism.This paper is divided into four parts as follows.The first part generally introduces the current situation of the industry development in China’s securities market.Firstly,it analyzes that the reform of the securities issuance registration system to be fully implemented in China’s securities market will pay more attention to the quality of information disclosure of issuers in the securities market;secondly,it analyzes the administrative penalties of China’s Securities Regulatory Commission and judicial decisions in the past ten years,pointing out that there are still more violations in China’s securities market,and the main violations are concentrated in the three sectors of information disclosure,insider trading and securities market manipulation.Then,we point out the importance of establishing a "muddy water" shorting mechanism to strengthen external supervision.Third,through the analysis of China’s Shanghai Stock Exchange,the lack of shorting power in China’s securities financing and financing,and the inherent need to strengthen the external supervision mechanism of the securities market and establish a professional and mature shorting institution.The second part analyzes the legitimacy of establishing a "Muddy Waters" shorting mechanism in China,and in view of the fact that the "Muddy Waters" shorting mechanism needs to be based on the shorting mechanism,this part mainly analyzes the advantages and disadvantages of the shorting mechanism in order to eliminate the public’s misconceptions about shorting.Firstly,we analyze the risks of the shorting mechanism,pointing out the risk of trampling due to herding effect,the risk of short selling and the risk of noise trading,and pointing out the avoidability of these risks.Second,by analyzing the existing conditions of China’s securities market,the financing and securities financing system and the securities supervision system,we point out the feasibility of establishing a "muddy water" shorting mechanism in China.The third part focuses on the legality of the "Muddy Waters" shorting mechanism under China’s securities regulatory legal system.First,it analyzes the profitability of shorting agencies such as Muddy Waters,and points out that if they provide shorting reports without compensation,they are not involved in securities investment advisory business and do not need to obtain administrative licenses.Secondly,we analyze the risk of insider trading involved in the "Muddy Waters" shorting mechanism,pointing out the independence of shorting agencies from listed companies and their market status,and that shorting agencies do not constitute insider trading if they do not obtain insider information through illegal means.For the issue of market manipulation,this paper mainly analyzes the information-based market manipulation it may involve,including market manipulation by taking advantage of information,hat grabbing trading behavior,compulsion trading and the act of disrupting the securities market by spreading false information and misleading information.In the fourth part,we analyze what needs to be considered for the establishment of a "muddy water" shorting mechanism in China in conjunction with the previous discussion.First of all,given that "Muddy Waters" shorting is only based on ordinary shorting and the early detection of financial fraud of listed companies through the issuance of shorting reports,it is still a shorting mechanism,therefore,on the basis of the existing shorting system,the source of securities should be further expanded to enhance the trading tools for shorting in the market;at the same time,on and off-site options,warrants and swaps should be expanded.At the same time,financial derivative products such as options,warrants and swaps should be expanded on and off the market to enhance the basic path of shorting transactions.Second,it analyzes the specific path to strengthen the supervision of the "muddy water" shorting mechanism in the securities market,including establishing and improving the position disclosure mechanism of shorting institutions,strengthening the supervision on the authenticity and compliance of shorting reports,and improving the supervision mechanism on the disruption of the domestic market by foreign shorting.Finally,this paper analyzes the entry point for establishing a "Muddy Waters" shorting mechanism in China,which can be established by registering and filing a number of shorting agencies based on the existing investment advisory agencies.At the same time,the form of shorting reports and the corresponding disclosure mechanism can be clarified through the issuance of guidelines to promote the disclosure of shorting reports and the corresponding response information of shorted companies.