The 'Goldman Sachs of China' is in huge trouble for betraying the government

Citic Securities, known as 'China's Goldman Sachs', is under investigation for disobeying a government edict against short-selling this summer, Bloomberg reports.

The report says that a Citic presentation dating back to June pitched products and structures to foreign investors that the Chinese government would come to consider "malicious short selling" after the nation's stock markets crashed twice in a two month period.

Timing here is key. What was seen as innovation by China's financial-services sector one month, came to be considered betrayal the next.

The turning point was a collapse in China's Shanghai Composite and the Shenzen stock markets in June and August.

The crash followed rallies of around 150% in the year and a half or so before.

During the boom, the government and consumers alike encouraged and demanded financial innovation. Citic was at the vanguard of that, helping mainland and foreign investors access China's A-share market with instruments that are fairly standard outside of China, like swaps that let investors could gain access to assets without directly owning them, and short selling.

The rules are hard to follow

When China's stock market started to tank, however, the government started to put rules in place banning short selling. It also asked financial firms to buy stock in order to prop up the market. Citic was one of those firms that was supposed to help out.

According to Bloomberg, though, Citic was still touting the use of their swaps as a shorting tool after the crash. Last month the Chinese government suspended the use of issuance of new swaps, and Citic started investigating what happened with them over the summer too. They found that they'd been betting against the market while working to prop it up for the government at the same time.

On December 6th, Citic said that it was unable to contact two of its senior investment bankers. That's become something all-too-common on China's Wall Street. This fall the government announced that it would focus its anti-corruption activities on the financial services industry.

Since then, financiers as powerful as 'China's Warren Buffett' have been taken into custody "to assist" with investigations into their businesses and personal affairs. So basically what we're dealing with here is totally unprecedented, and it's unclear what will happen to Citic. The brokerage insists that whatever it was shorting, it wasn't enough to really impact the market.

The Chinese government may not care about though.

Read the full break down on Citic at Bloomberg.