Fear spreads as China’s finance firms face arrests

Zhang Yujun

The high-drama highway arrest of a prominent hedge fund manager. Seizures of computers and phones at Chinese mutual funds. The investigations of the president of Citic Securities Co. and at least six other employees. Now, add the probe of China’s former gatekeeper of the IPO process himself.
The arrests or investigations targeting the finance industry in the aftermath of China’s summer market crash have intensified in recent weeks, creating a climate of fear among China’s finance firms and chilling their investment strategies. At least 16 people have been arrested, are being investigated or have been taken away from their job duties to assist authorities, according to statements and announcements compiled by Bloomberg News.
The authorities’ goal is to root out practices such as insider trading as part of China’s anti-corruption campaign, and a desire by “some in the political leadership to find scapegoats to blame” for the market crash, according to Barry Naughton, a professor of Chinese economy at the University of California in San Diego.
“Together these are creating uncertainty and anxiety that can only undermine the effort to make these markets work better,” he said by e-mail.
Chinese authorities have long encouraged funds and brokerages to create new investment products to keep the finance industry along a development path. Now that’s been halted by regulators’ raids, arrests by police and anti-corruption investigations of even regulators themselves by the Communist Party’s disciplinary committee. JPMorgan Chase & Co. and Credit Suisse Group AG have scaled back products that allowed foreign investors to bet on stock declines. At least one Chinese research firm has withdrawn information it used to provide to the market, calling it “too sensitive.”
The government’s response to the market crash was intervention: state-directed purchases of shares, a ban on initial public offerings and restrictions on previously allowed practices, such as short selling and trading in stock-index futures. Next, high-ranking industry figures came under scrutiny as officials investigated trading strategies, decried “malicious short sellers” and vowed to “purify” the market.
Policy makers say “now we’re innovating, so you can all come in – using high-frequency trading, hedging, whatever – to play in our markets,” Gao Xiqing, a former vice chairman of the China Securities Regulatory Commission, told a forum in Beijing on Nov. 6. “A few days later, you say no, the rules we made are not right, there are problems with your trading, and we’re putting you in jail for a while first.”
“That makes our markets hardly predictable – such rules won’t bring stability,” said Gao, who later led China’s sovereign wealth fund and now teaches at Beijing-based Tsinghua University.
In the latest probe announced last week, Yao Gang, a vice chairman at the CSRC, is under investigation for “alleged serious disciplinary violations,” the Communist Party’s Central Commission for Discipline Inspection said. Known as China’s “King of IPOs,” he supervised China’s initial public offerings until earlier this year, when he changed to approve bonds and futures, according to Caixin magazine. He joins two other CSRC officials being investigated, one of whom, Zhang Yujun, was formerly the general manager of the Shanghai and Shenzhen stock exchanges.
The securities regulator carried out unannounced inspections of several Chinese investment firms including Harvest Fund Management earlier this month, taking away hard drives and mobile phones, according to people familiar with the seizures. Police in Shanghai also confiscated computers and froze USD1 billion of shares in listed companies connected to Xu Xiang, the manager of Zexi Investment known as “hedge fund brother No. 1,” who was arrested Nov. 1 on a highway between Shanghai and Ningbo.
Amid tumult in China’s stock market, five funds managed by Xu yielded an “astonishing” 249 percent on average this year through September, according to Shenzhen Rongzhi data. The Shanghai Composite Index fell 5.6 percent in the same period, after a 41 percent market plunge since June 12 wiped out earlier gains. His returns prompted speculation about the methods and strategies he used, according to analysts including Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong.
“The extent of this round of clampdown in the financial industry has surpassed everybody’s expectations,” he said. “Over the longer term, the clampdown on corruption in the financial industry will level the playing field in the market for smaller investors.” Bloomberg